I do not understand the buy and sell numbers you gave this morning for the buy and sell programs: $0.25 and $-2.72.
What do they mean? Could you give examples and correlate them to what to watch for in the indices, for example at what value of an index are the programs to kick in? Could this be said in a single liner on the monitor? Explicitly?
This is perhaps a timely question, but also a very frequently asked question as it relates to each morning's 09:00 Intra-day Update that PremierInvestor.com and OptionInvestor.com subscribers will either browse across, or find interesting, but feel there's no way they could ever find it useful. Even some "experienced" traders feel this tool has no application and is of little use.
I will attempt to keep this simple and not get into all of the complexities of arbitrage trading, but that's exactly what these buy/sell program execution levels from HL Camp & Company will generate if the their "buy" or "sell" program premium level is traded.
Lets start out with the "cash" market. The S&P 500 "cash" market is the S&P 500 Index (SPX.X) 889 -1.33%. At any second in time during market hours, the combined total of the 500 stocks in the S&P 500 Index will equal the SPX.X. In essence, its the current "cash" price of these 500 stocks combined. You will see why you need this to then "generate" the eventual buy/sell program alert.
Each morning, we also talk about the S&P 500 futures (sp03h), which at 04:00 PM EST were trading 888. Here however is a price of a security that traders are actually trading based on FUTURE expiration in March. Notice the price difference?
Sometimes we see a wider margin of discrepancy between the "cash" (SPX.X) and futures market quotes. That's when the also quoted "fair value" given in each morning's comments come into play, but that's a different topic all together.
It should also be noted that S&P 500 futures don't ALWAY trade below the cash price like they are right now. There are times when they trade above the cash price.
But its the "difference" between the cash and futures markets that then comes into play as it relates to the buy/sell programs that HL Camp & Company gives each day that can alert traders to institutional buy/sell programs being triggered.
Now, we just noted a $-1.00 difference in the cash versus futures S&P 500 quotes didn't we? Do you see where I'm going? That's getting close to HL Camp & Company's ... computer sell programs are set for $-1.25.
So. How do I "know" if some type of computer program is triggered?
You and I could sit and watch the S&P futures trade with one eye, while watching the stock we're trading with the other eye. The thinking being "boy... if a computer sell program comes in and futures trades lower, then the stock I'm trading that's part of the S&P 500 could also see selling." Wow! That would make for a real efficient stock trader wouldn't it? Only thing is, I couldn't be watching much else if I had to always keep my eye on the futures for some type of sharp move lower.
By establishing a buy/sell premium execution level, a trader using a trading station like Qcharts, which is what I'm using on a daily basis, can set some upside and downside alerts at what is called the S&P Premium levels. For Qcharts, the symbol is $prem.x .
All this does is MEASURE the DIFFERENCE between the cash price of the S&P 500 and the futures price of the S&P 500. The DIFFERENCE can be thought of as the arbitrage spread.
It's when the PREMIUM levels are achieved, that the market suddenly experiences a moment of inefficiency and "things get a little too far apart." It's at these "inefficient" moments that the premium alerts can be triggered, and alert the trader to a program buy or sell program coming into the market.
Once again, the trader that thinks like an institution will better understand. If you're a Goldman Sachs, carrying billion of dollars in stock inventory and the markets are declining, is it feasible to coordinate an effort among your human traders to control the risk, or hedge that inventory risk? Certainly not. But if you've got a computer, that "knows" to the last share how much stock you have in inventory (or don't have if you're net short a stock in inventory) and what the cash market price is for all those different stocks, you can set market levels as buy or sell points and have your computer systematically buy or sell the S&P 500 to help hedge your broader inventory.
How could I do this if I'm long $10 billion worth of S&P 500 socks in my inventory. If my net cost is SPX.X 850 at what lower level do I need to hedge that risk? I might consult my chief technical analyst and ask... "at what lower level should we hedge our downside?" The analyst might say... "if we trade below 900, then we might have downside risk to 880 and 61.8% retracement." OK, then if we trade below 900 we'll need to sell $3 million S&P futures short as a hedge, and sell $20 million worth inventory that we bought at SPX 835. The sell program for the futures is placed with the computer to sell $2.
The above is a very simplistic example. Computer programs are actually being used on an minute-by-minute basis, but what a trader will be concerned about or perhaps monitoring is the more meaningful points where a buy/sell program is triggered.
So without have to look at or monitor the minute-by-minute differences between the cash and futures market, lets simply look at a chart of the Premium of S&P 500 Futures ($prem.x) from Qcharts. What I'll do is build a "collar" on this chart, using the buy/sell program premium levels of $0.25 and -$2.72 that were given on Friday morning. With Qcharts, I can also set an "upside" alert on this chart at $0.25, and a "downside" alert at -$2.72. Then, if those levels are achieved, I will be "alert" to some type of computer program having been triggered that tells me that some institutional buying/selling is taking place.
Premium of S&P 500 Futures ($prem.x) - 10-minute interval
I show the above chart of the $prem.x only to give us a visual "perspective" of what's taking place as the "spread" between the futures and cash index varies marginally during a trading day. It's at the "extremes" of the buy/sell program levels that we want to be alert. That's when the market becomes "inefficient" and an arbitrage opportunity presents itself. As you can see from the above chart, there really were only "two" premium alerts generated. Sure, there were undoubtedly many other "computer programs" being run during the day, but nothing "major."
Here's how a trader can perhaps "use" these alerts. If you're thinking that this information is only good for short-term traders, you'd be partially correct. After all, these buy/sell program levels change EACH DAY.
But put on your thinking cap for a moment. What if you're trading the indexes, or a stock and you're getting close to your targeted level for closing the trade? After all, in your trading plan you probably had an entry point, profit target and stopping point defined right? Wouldn't it be helpful if you were $0.25 way from your bearish target in a stock option trade and all of a sudden you start getting "buy program" alerts in the broader S&P 500? That might alert you to lower a profit stop wouldn't it? What if you got a "sell program" alert as the stock option your trading nears its target and all of a sudden your stock fall $0.50 below your profit target? Is there something wrong with the stock, or is it trading with the computer programs that were just generated? This might have the trader simply lowering a trailing profit stop to his target and looking to see if the stock might not drop further as bulls simply want out and continue selling it lower.
Couldn't a trader also make some sort of observations as to "why all of a sudden does the program alert get triggered here? Is there something important about this level that needs to be understood? Maybe I'd better make a note at what $spx.x level that program was triggered as it could come into play at a later date and time." I've found that good technical traders are always inquisitive and asking themselves questions and looking for answers in the charts.
To get a better understanding that the S&P buy/sell premium alerts are a RESULT of the cash and futures markets, lets look at both the cash and futures charts on a 1-minute time interval. We'll also ask some question, make some observations, and chart those observations later on as the trading day unfolds.
S&P 500 Index (top) versus S&P 500 futures (bottom) - 1-mnt chart
It made "sense" that we'd get a "sell program" at the open as S&P futures (lower chart) had traded down last night and were around 893 when the cash market (upper chart) opened for trading at 09:30 AM EST. Institutional computers sold some stocks in order to "catch up" to what had happened between Thursday's close and Friday morning's open.
Observation #1: Why is the cash breaking below a level of "support" that seemed to form early at 894, when the futures seemed more "disciplined" and held their low in neater fashion? Hmmm.... never sure, but 894 might be "key" level in cash, and 892 "key" level in futures.
Obeservation #2: I set the "black box" in each chart to reflect the 09:47 AM time frame. You can look at a 1-minute interval of the $prem.x chart too and see the premium jumping to above $0.25, which was the buy program. Yes, its a sudden move higher, but that's what a little institutional capital hitting at once can do. Hey, if you were a bear and shorted/put the SPX or SPY on the break to a morning low below 894, the sudden jerk higher against you was at least "understood." Hey! That stinks. I just shorted and had a buy program crammed down my throat. I'd better make note of that 894 cash level as it might serve support later on today, but I'd sure feel better if no more buy programs are triggered in the next hour and the SPX falls back below. Then it might become resistance.
Observation #3: 6-minutes later (you don't know it at the time) the SPX reaches a relative high, reverses lower and takes out the 894 level and breaks to a new intraday low. Hmmmm..... What's with this 898 level in the SPX? No buy programs, no sell program alerts, somebody doesn't like the SPX there. It's probably nothing, but I'll make a note of it. I also have a level at 900 marked as a potential "psychological" level of resistance.
So lets look at the entire day of trading and see if our "buy" program level had any type of influence on today's trading. Let's also see if our "rally reversal" levels had any influence where we didn't find any "premium alerts" but may have been traded by "human intervention."
S&P 500 Index (top) versus S&P 500 futures (bottom) - 10-mnt
Remember, all of the above "levels" are based on today's trading and may not have any historical significance to past levels that may carry greater technical significance. I looked at the SPX daily chart and the only 894 level that I find interesting is two consecutive closes on November 12th and 13th, which ended up being pullback levels before the SPX made it recent relative high at 953 on December 12th. Maybe, just maybe there were some institutional buy programs set at this 894 that have this being some type of pivot. However, with just one buy program there, I can't put a lot of "faith" in it having significance. I can make a note in my journal about it, but nothing to major.
However, our "human intervention" level near SPX.X 898 did find some technical significance at least on an intra-day basis. My thinking here is that "loss of faith bulls" may have simply "sold too early before 900" as Jim Brown always teaches, with the thought of "why try with the weekend just ahead."
So... Friday's 1 "sell" (at the open) and 1 "buy" premium execution level in a day isn't that meaningful in the above example, but some days, several buy or sell premium execution levels are generated.
These "buy/sell" premium levels aren't something I think a trader "has to have" to be successful in trading. However, like some tools in your toolbox, like that odd shaped screwdriver, you just never know when it might "come in handy." Like the time we shorted a full position in the SPY into a powerful rally and didn't know that 5 "buy programs" had been triggered in the previous hour, which found the newswires reporting 30-minutes later that world peace had been achieved.
Hopefully this helps traders "understand" the basics of how and why we place the buy/sell premium execution levels in the 09:00 updates each morning.
I think it would be neat if a trader set an alert at some target in the SPX, or stock they're trading and if short and the stock trades your target you had set, or very close, and all of a sudden you receive a "buy program" premium alert, instead of wondering if the trade should be closed out, you be ALERT as your trading station has given you two alerts at a level YOU deemed important is also deemed important by the market. At that point YOU the trader begins to exude confidence and become more disciplined in getting ready to trade your end-plan. YOU immediately think... "Aha! I need to be alert here for a potential reversal and can't hesitate if the stock/index I'm trading begin to rebound."
It would also be neat if a trader set an alert at some type of bullish entry point where he/she thought a stock would either rebound from support or break-out of congestion and that technical alert on your trading station was triggered. However, you look at the S&P 500 trading sideways and perhaps lack some conviction in the trade due to lack of broader participation. But minutes later... you get a "buy program" premium alert! Hey, that's two bullish types of alerts. Then perhaps, the confirmation of prior thought that bullishness might take place at this level gets some confirmation.
Are you holding current month index options that will expire next week? If so, then this shorter-term tool of daily buy/sell premium levels may give the SPX index trader some near-term levels to begin working with. If you hold some SPX 900 puts, you might at least think a stop above 892 is warranted. Is the SPX going to "peg" the 900 level at expiration? It might, but it might not if we get 10 sell programs at 892 on Monday. However, if we were to see a buy program at 892 on Monday, followed by a little pop to 895, then a pullback to 892 and get another buy program alert, then it might be a good idea to close out a December 900 SPX put.
Conclusion: As you can perhaps see, the buy/sell premium levels aren't necessarily "tied" to an identifiable level in the SPX for S&P futures. In its most simplistic form, the premium alerts are generated by meaningful DISPARITY between the cash and futures markets. It the sudden and sometimes "unexplainable" level where a large amount of buying or selling in either the futures or cash markets becomes powerful enough to create a sudden inefficient market that "wakes traders up" to something.
It's been said that "smart money" always knows first. If you knew that world peace was going to be announced in the next 30- minutes, most people would probably take their last dollar and either buy S&P futures or S&P January 900 calls wouldn't they? It's not that institutions are the "smartest" money in the market, but its institutions that have the most money in the market and its money on the buy or sell side that will drive price action. Institutions also use computers, which are very unemotional, to control their stock portfolio risks. It's these darned computers that can have impact on how the markets trade and one way to be alerted to a meaningful move in equities is the buy/sell premium levels.
Last notes: 1) Interesting how the cash and futures both settled right on their 50-day SMA's. Monday morning will be interesting won't it? I would want to set an upside and downside alert on the SPX or S&P 500 futures (sp03h) and then Monday morning, set the buy/sell premium alerts for $prem.x.
2) I also made some final observations at the last part of today's trading between the SPX and futures chart. There we see that the futures extended losses in the final 15-minutes of trading. While fair value, which we also report each morning, is only to inform traders of how stocks will most likely open the session (up or down), we can envision how futures might be up 1- point at 887.20, but if fair value were $4.00, then a lower open in the cash market would be the likely result.
3) You've seen on CNBC when the market has made an up or down move greater than 160 Dow points, that they post "curbs in." That was put in place to limit computer initiated buy or sell programs. Again, computers are computers they don't "reason" anything. Can you imagine what could happen if a computer program had a software flaw and all of a sudden started buying $5 billion worth of S&P futures every 10 minutes? The only thing to shut it down is for trading curbs to go in place and not allow any further computer program trades to execute.
4) During the week, S&P futures trade around the clock for the most part. Did you know that? S&P futures didn't just fall from their 04:15 PM daily close on Thursday to our 09:00 AM update Friday morning. They worked their way lower as traders from around the world traded the contract lower.
For the most part, fair value isn't "that important," but does give the trader a quick "feel" for how the cash market will open for trading.
Well... I hope everyone has a great weekend! Once again, I can get a little long winded in my writing. I find this kind of stuff simply fascinating. What will they think of next? Single stock futures is my guess. Oh goodness, maybe I should develop buy/sell premiums for every single stock that trades futures on the underlying stock too!
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