Fed Chair Yellen Has The Stock Market On Edge, Contrarians Look For A Rally (Option Trade Included)

There is uncertainty in the markets over the outcome of this week’s pending talk by Fed Chair Janet Yellen. Announcements typically provide the opportunity for everyone to provide their opinion. It’s like waiting for the Preakness Stakes or the Western Conference Basketball Playoffs. Opinions abound, but the uncertainty remains. The uncertainty of the next Fed move provides an opportunity for contrarians to excel.

I’m certainly no expert on Fed policy; however, the Implied Volatility of the E-mini S&P Options gives me an indication of the possibility for a Stock Market Rally. Normally, in times of uncertainty there is a dramatic increase in Implied Volatility. Recently, however, the Implied Volatility of the E-mini S&P has remained relatively stable. If the Stock Market receives Fed news that is deemed to be favorable, there is an opportunity for a move to the upside.

For those of you who have cash waiting to put to work in the market at the appropriate time, the current environment may be good for an Options Strategy Called a Ratio Long Fence. It’s always a good idea to average into your longs and this strategy provides an opportunity to do just that. It involves Selling an out-of-the money Put and using that money to Purchase out-of-the money Calls. Although the Implied Volatility of the Put you Sell is relatively low, the Calls that you Purchase have an even lower Implied Volatility. If you’re looking to Purchase Stocks at Lower Levels, this might be an Options Trading Strategy for you. Be sure that you are looking at the nominal value of the Option you Sell and be prepared to make another, similar trade, if the market goes lower. That way you will be able to put more money to work at even lower levels.

The Table below shows the details of the Strategy. Due to the Implied Volatility Skew of the Options the Strategy requires Selling One June 1950 Put and Buying Ten 2150 Calls. The net expenditure on the Trade is zero. If the market should drop, you will be able to get Long the market about 100 points lower than its current trading price. At that point your nominal exposure is to $97,500 worth of Stock. Should the market rally, the Calls you purchase, 10 of them, would lead you to exposure of $1,075,000 of Stockthrough the E-mini S&P Futures.

 

Creative Options Strategies provide traders with the opportunity to develop positions that meet their risk/reward requirements. The Options Guide PDF can help you get a better understanding of what background is needed for effective Options Trading.  If your desire is to get long stock at lower levels, in this case approximately 5% below the current trading level, the Ratio Long Fence may be perfect for you. Contact Us to gain clarity on this and any other Options Trading Assistance you may need. Our Options Training Webinars can advance you to the next level of trading.

The Options Trading Strategy, shown in the Table above, takes advantage of:

  • ·         Providing a Strategy to add additional Long Equity Positions at Lower Levels
  • ·         Using the Implied Volatility Skew to provide additional value
  • ·         An acceptable level of liquidity, although not fantastic , to execute the strategy
  • ·         A favorable comparison of Historical and Implied Volatility

Options trading involves significant risk and is not suitable for every investor. The information is obtained from sources believed to be reliable, but is in no way guaranteed. Past results are not indicative of future results. 

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