V.7:8 (249-250): Using MMI to trade OEX by Dan Downing

Using MMI to trade OEX by Dan Downing

My firm uses an indicator derived from the Major Market Index (MMI) Stock Index Future to trade options on Standard & Poor's 100 Stock Index (OEX). The indicator is used to determine when the MMI future is in very oversold territory and subject to a short-term bounce.

Let me emphasize that the phrase "short-term bounce" refers to two or three days, no longer. Our research has shown that when the MMI future is very oversold, the equity markets are ready for a bounce. Instead of buying the future however, we purchase OEX calls to take advantage of the anticipated bounce. Futures make good indicators, but options make better short-term trading vehicles.

The first step in constructing the indicator is to record the closing prices for the nearby contract and for the month after the nearby in the MMI future. Since the future expires every 30 days, you should record and figure the indicator for both months so you always have a usable indicator as soon as one month expires. Although both indicators will give similar values, use the data from the near-term month until that contract expires.