Not too many surprises came out of yesterday’s FOMC announcement. Interest rates remain unchanged (as most Fed watchers expected), and most on the committee do not see a change until after 2014. Chairman Bernanke did give some hints about possible changes in the near future for the Fed’s asset buying program.
Chairman Bernanke spoke of a new optimistic view on the economy, looking for the unemployment rate to dip to 6.5% by 2014, almost a year ahead of previous forecasts. He also stated that the Fed will continue with its bond buying at a rate of $85 billion a month for the short term, but as the economy improves that could change. Those who read tea leaves may view that as a clue that tapering of the program is right around the corner.
The fear or threat of tapering may give those with a bearish view some confidence in a downside move. Traders looking for a potential sell off may want to use a bear put spread to put their view into action.
THE TRADE
I like buying the September E-Mini S&P 500 1600-1550 put spread. I have a target entry of 10 points ($500.00) or better. Since the trade is long premium, risk is limited to the cost of entry plus fees and commissions. September options expire on 9/20/13, so we have some time on this trade. A maximum target exit is 50 points; I would look to start scaling out at 20 points or better if you are trading multiple contracts. If we see the S&P continue to surge higher, I would walk away from the spread if it trades below 5 points.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.
