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Quo vadis FED?

Trying to assess where the market would go now is close to impossible. We have FED coming out with their report and the clowns at Wall Street will take their leaf reading witch craft ability to guess what Janet Yellen meant by keeping or removing a word “patient” from their report. Based on that they will either panic or cheer and the market will either crash or spikes to new all-time highs.

 
Yellen
Credit: www.theaustralian.news.com.au
 

One event can make our open bullish trades profitable, the other can ruin them. With options, a time sensitive instrument, we do not have much space for further positioning ourselves for a possible outcome.

We have a bullish trade – a bull put spread against SPX with expiration at the end of the month. If the market tumbles we may not have enough time to recover and not enough margin to roll. And even if we had margin to roll, I am no longer willing to use cash to protect this trade and its profits. I am leaning to steps which would get us out with minimum or no loss at this point.

However, we still can profit with this trade. If the market cheers the FED, we will stay the course, do nothing, and take our profits. If we tumble, we have to act and adjust our trade.

The easiest way to adjust the trade would be to reverse it into a debit trade. That would look like this:

We have:

-3 SPX Mar5 2015 2100 puts
+3 SPX Mar5 2015 2095 puts

We would have to perform the following trade adjustment: buy back the short options and sell new with lower strike:

+3 SPX Mar5 2015 2100 puts
-3 SPX Mar5 2015 2090 puts

After the adjustment, we will have the following trade:

+3 SPX Mar5 2015 2095 puts
-3 SPX Mar5 2015 2090 puts

For this adjustment we will pay a debit (currently 5.50 per spread, or 1,650 total for the entire trade). The profit is the spread width or $1,500. Normally this trade would result in a loss, but we have to add previously received credits. And with the previously received credits our cost for this trade would be 1,365. Thus the profit would be 1,500 spread width minus 1,365 cost = $135 total gain. Since this trade will be exercised, the cost for exercise is quite high, so I estimate the remaining profit would be only around $40.

Not bad prospect for this disastrous trade. Let’s see what the trading would look like tomorrow. If the market goes higher, it would improve our potential reversal of this trade in case the stock market crashes on Thursday morning. If it goes lower tomorrow, our reversal cost may become worse and we will end up with a loss. But the loss may be small compared to a total loss which would occur otherwise.

Good luck on trading and let’s hope the FED won’t spook the investors into a sell off.
 





2 responses to “Quo vadis FED?”

  1. Good luck today with the Fed. Let’s hope it follows the usual path of a bunch of hype and not much of an effect in the end, although I need bond prices to fall a little to help my TLT short position.

    Side note – I knew a girl growing up named “Quovadis”. True story.

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