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Jobless rate less than expected

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Nonfarm payrolls fell by 19,000 in May, but the unemployment rated also fell back to 4.4%. This morning's jobs report was slightly better than expected than many economists had expected. The forecast was for 30,000 jobs to have been cut and a rise in the unemployment rate to 4.6%. Average hourly wages rose just 0.3% as many workers look more toward job security than wage increases.

Stock futures are mixed

Stock futures are looking mixed before the bell with S&P futures trading down just 2 points. NASDAQ futures have recovered from earlier losses and are currently showing gains of 23 points and Dow futures have also recovered some earlier losses and now trade lower by 5 points. Fair value for the S&P 500 for today is $1.57. Computer programs are set for program buying at $2.73 and set for selling at $.11

QQQ straddle for June with $45 strike

I received multiple e-mails from subscribers after profiling a straddle trade in the QQQs on how to manage such a trade after it was implemented. There are different ways to manage the trade, but the above hypothetical shows that a trader's maximum risk would have been $800 plus any commissions based on 2 June45 calls (.QQQFS) and two June 45 puts (.QQQRS). That's the bottom line and that's one way to now try and manage the trade. If the trader were simply looking to try and take advantage of volatility based on pending economic data, the trader may only be looking at this trade on a short-term basis "buy the rumor and sell the news" type of trade. Markets are very efficient in how they process economic data and that may have a trader simply waiting until the news is out, let the market adjust to the news, and then the trader decides if they should close out their straddle.

For instance... I'm writing this commentary Thursday evening (May 31, 2001), but lets imagine that the QQQs open for trading at $42. That would probably have the QQQ June 45 put (QQQRS) bidding at a minimum of $3. If after an hour passed and the QQQs were to have dropped to $41, the QQQRS would be bid somewhere close to $4. At that point, a trader might simply close out the put side of the option to try and recoup the bulk of their investment between the two options previously purchased. There would still be the cost of commissions to consider, but different subscribers have different commission schedules and we're trying to keep things simple.

Ideally, we always want to sell at the maximized level, but if a trader were to simply monitor the "value" column of their trade and weigh the risk/reward based on cost/value (remember, your risk going into the trade as outlined here was $800 + commission). One way to think about things is this. My risk when entering the trade was $800. If after two hours of trading my current risk is $0 (difference between original cost and value of one of the options) wouldn't it make sense to be at the ready to close out the most profitable option, reduce the risk in the trade to $0 and then let the other option become the "gravy?" That's one way to trade a straddle and it doesn't necessarily take any technical analysis.

Now for those traders that do like to try and pick bottoms and tops, they can most assuredly use their technical prowess in the markets, but also be monitoring the "bottom line" of their trade. If the QQQ were to reach a level of resistance or support where they think action should be taken on the put or call option, perhaps the bottom line of the trade would become the deciding vote. If a trader saw that one of his/her options could be closed out near a support/resistance level and have that option removing all of the original risk in the trade that would probably make for a very confident trader. Then if the QQQ were to reverse initial market reaction course, the open option would then become the reward/profit for the straddle trade.

A trader that trades straddles is not trying to call the market. All they're looking for is situations where market volatility could occur and trying to sell their call or put at the maximized level. Perhaps the above "technique" is one way for traders to look at their trade based on risk/reward. If institutions make the bulk of their buy/sell decisions on risk/reward analysis, perhaps individual traders should too!

Jeff Bailey
Senior Market Technician

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