And another new contributor is unveiled – Futures & options expert Richard Jones of Hedgeratio

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Richard Jones of Hedgeratioanalysis

SBM are please to introduce a new contributor to our unique publication and one whom we think fits well with our offering, namely that of real traders operating in the markets and providing useful and not generic information. In his first piece for us Richard Jones of HedgeRatio explains where he sees the dynamic delta hedging coming into play in a number of popular markets. For active day traders it pays to take heed of these levels and ins another useful arrow to your arsenal when doing battle in the markets.

Stock index options and futures business have grown immensely over the last couple of decades and now exert a considerable influence on all markets. An influence every trader should at the very least be aware of.  

The hedge ratio is the calculation of this influence with white being neutral, then yellow for minimal following on through red into grey for ever increasing levels. At each level you will see futures buying or selling generated by dynamic delta hedging brought about by the market re-balancing its risk profile.  

You will get no better example of this than the DAX 30 on Friday 23rd May 2014 where on our chart below it moved from light red hedge ratio into medium red hedge ratio. 

Because we use end-of-day data this looked a simple task but have a look at the intraday chart for this day and you will see at least six attempts by the market to get above 9750 throughout the full trading day, and it only just managed to succeed in the last hour.

 So as you can see the hedge ratio for Monday has not changed so 9750 will remain a significant level, with the top of this hedge ratio bandwidth at 9850. 


If it is in full blown bullish mode dark red hedge ratio is waiting for it at 9950, which is the same level this index bounced off at 8950 back in March when it was going the other way. 

A lot more downside to upside for us. 

Looking at the S&P 500 next and we mentioned in our daily note on Friday that here their neutral zone (NZ) could easily move up to 1895-1905. 

As a rough guide when the bulls are in charge the market is above their neutral zone, whereas below and it’s the bears in control. 

So had their zone moved, it would of made this the only index we chart to actually be below its NZ. 

Here their first hedge ratio test will come at 1905, which if they manage to overcome goes on up to 1925 with dark red ratio at 1930. 

If this index is sensitive enough to react to the hedge ratio at 1905 then the corresponding level below the market is at 1820. 

If it punches higher and takes on the hedge ratio at 1925/1930 then that same level of hedge ratio does not appear until you get down to 1795 and 1770. 

Like the DAX 30 a lot more downside to upside for us. 

With London closed today we thought we would cover the Nasdaq 100, especially as it witnessed such huge levels of activity last expiry. 

Since last Wednesday, this index has been forging ahead and being very bold taking on the futures coming onto the market as it moves ahead in the light red hedge ratio. 

Of course nothing wrong with that at all, in fact quite the reverse as it shows they are committed enough to actually buy them. 

However a far sterner test awaits this market at 3700 with a darker red hedge ratio just above that at 3725, and with dark red above that at 3825.

The corresponding levels of hedge ratio below are at 3475, then 3425 and finally 3325. 

However just to point out that in all our charts the hedge ratio can change daily, and in the case of the Nasdaq 100 above it can be clearly seen building both above and below the market, so time is of course a major issue.

Also we chart the near month expiry, what we like to call the alpha expiry, as in the dominant one, so our charts cover roughly mid-month to mid-month. 

Also please be aware June is not only a 5 week expiry it is also the second triple witching one of the year and so by nature is far far larger than the intermediary ones. 

So to recap all three indices above are in or approaching ever increasing levels of hedge ratio detailed below: 

For the DAX 30 the levels are 9850, 82 points away (0.84%), and 9950, 182 points away (1.86%). 

For the S&P 500 they are 1905, 5 points away (0.26%), and 1925, 25 points away (1.32%). 

For the Nasdaq 100 they are 3700, 23 points away (0.63%), and 3725, 48 points away (1.31%).

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