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How To Trade The Fed: Option Strategies For Thursday

Industry News 04:20:09PM Sep 17, 2015 Source:SMM

By  Paul Ploumis 17 Sep 2015  Last updated at  03:59:30 GMT

(Kitco News) - To repurpose an old cliché: sometimes the best offense is a good defense, especially in financial markets when there is so much uncertainty surrounding Thursday’s Federal Reserve monetary policy decision.

According to four market analysts, investors interested in trading off of the Federal Open Market Committee meeting should look at using options to limit their risk, utilizing a straddle strategy that provides an opportunity to play both sides of the market.

“In this type of environment, you want to be on both sides of the market. You don’t want to bet on one side of the market and end up being wrong,” said Matt McKinney, strategist at the Zaner Group.

Phil Streible, senior market strategist at RJO Futures, said that his strategy, a pure options play, would be to buy a 60-day call option with a strike price around $1,120 and at the same time a 60-day put option with a strike price around $1,080.

He explained that if the Federal Reserve decides to hike rates Thursday, then he would expect prices to break below $1,080, putting the put in the money. He added that you could sell the put option and still keep the call and wait to see if prices rally off the low.

On the other side of the scenario, he said that if the Fed stands pat and doesn’t raise rates, then gold prices could climb well past $1,122. However, with expectations still in place for an eventual rate hike, he said that after selling the call option traders can keep the put in play, expecting to see renewed selling pressure.

“I think this is a good defensive play that can pay off for investors,” he said.

While McKinney said that he does see a lot of potential in the straddle play, he said that he prefers a shorter time frame, liking the November options, which gives a trader 41 days until expiration.

McKinney’s strategy is to buy the November $1,120 call option, which as of Wednesday was already “in the money” with December Comex gold futures trading around $1,120 an ounce. At the same time, he likes buying the November $1,115 put option.

“Right now the market is right in between these two options and is the perfect straddle,” he said. “A $20 dollar move in gold either way on tomorrow’s Fed announcement and you have double the value of one of your options.”

McKinney added that the cost of the option is also a positive with investors having to pay around $2,200 for the put and about $2,300 for the call.

Ted Sloup, senior market strategist at iiTrader, agreed that the options straddle was a solid investment strategy; however, he also has another idea. He added the downside to the pure option play is the initial cost, since with 40 days until expiration, investors are paying for a time premium.

If an investor is only interested in trading the Fed meeting, he said that he likes a options/futures play. He said that if you think the Fed is going to raise interest rates on Thursday, then an investor could buy at least five or six $1,080 October puts and then buy one futures contract.

If the price falls, investors should be quick to get out of their futures contract to limit their losses, which would be made up in the profits from the put.

On the flip side, he said that investors who think the Fed is going keep rates unchanged could buy five or six $1,120 October calls and short one gold futures contract.

Sloup added that with this strategy, investors need to pay attention to their trade and manage their positions effectively.

“There are a ton of different flavors in the market. It all depends on your risk tolerance,” he said.

Sean Lusk, director commercial hedging division at Walsh Trading also provided a strategy that is both easy on the wallet and is a shorter time frame.

In an email to Kitco he said that he recommends buying the October $1160 call and the October 1,080 put, which cost about $400 each.

“This is purely a volatility play as October options expire on Sept. 24, leaving a week for a sizable move following the FOMC,” he said.

“Despite the Fed announcement tomorrow that will no doubt rattle commodity markets, it is largely seen as a one and done scenario should the Fed hike rates a quarter point,” he added. “I believe the proper course of action going forward is to have some exposure on both sides of the gold market into the FOMC.”

Courtesy: Kitco News


Key Words:  gold price   US rate hike 

How To Trade The Fed: Option Strategies For Thursday

Industry News 04:20:09PM Sep 17, 2015 Source:SMM

By  Paul Ploumis 17 Sep 2015  Last updated at  03:59:30 GMT

(Kitco News) - To repurpose an old cliché: sometimes the best offense is a good defense, especially in financial markets when there is so much uncertainty surrounding Thursday’s Federal Reserve monetary policy decision.

According to four market analysts, investors interested in trading off of the Federal Open Market Committee meeting should look at using options to limit their risk, utilizing a straddle strategy that provides an opportunity to play both sides of the market.

“In this type of environment, you want to be on both sides of the market. You don’t want to bet on one side of the market and end up being wrong,” said Matt McKinney, strategist at the Zaner Group.

Phil Streible, senior market strategist at RJO Futures, said that his strategy, a pure options play, would be to buy a 60-day call option with a strike price around $1,120 and at the same time a 60-day put option with a strike price around $1,080.

He explained that if the Federal Reserve decides to hike rates Thursday, then he would expect prices to break below $1,080, putting the put in the money. He added that you could sell the put option and still keep the call and wait to see if prices rally off the low.

On the other side of the scenario, he said that if the Fed stands pat and doesn’t raise rates, then gold prices could climb well past $1,122. However, with expectations still in place for an eventual rate hike, he said that after selling the call option traders can keep the put in play, expecting to see renewed selling pressure.

“I think this is a good defensive play that can pay off for investors,” he said.

While McKinney said that he does see a lot of potential in the straddle play, he said that he prefers a shorter time frame, liking the November options, which gives a trader 41 days until expiration.

McKinney’s strategy is to buy the November $1,120 call option, which as of Wednesday was already “in the money” with December Comex gold futures trading around $1,120 an ounce. At the same time, he likes buying the November $1,115 put option.

“Right now the market is right in between these two options and is the perfect straddle,” he said. “A $20 dollar move in gold either way on tomorrow’s Fed announcement and you have double the value of one of your options.”

McKinney added that the cost of the option is also a positive with investors having to pay around $2,200 for the put and about $2,300 for the call.

Ted Sloup, senior market strategist at iiTrader, agreed that the options straddle was a solid investment strategy; however, he also has another idea. He added the downside to the pure option play is the initial cost, since with 40 days until expiration, investors are paying for a time premium.

If an investor is only interested in trading the Fed meeting, he said that he likes a options/futures play. He said that if you think the Fed is going to raise interest rates on Thursday, then an investor could buy at least five or six $1,080 October puts and then buy one futures contract.

If the price falls, investors should be quick to get out of their futures contract to limit their losses, which would be made up in the profits from the put.

On the flip side, he said that investors who think the Fed is going keep rates unchanged could buy five or six $1,120 October calls and short one gold futures contract.

Sloup added that with this strategy, investors need to pay attention to their trade and manage their positions effectively.

“There are a ton of different flavors in the market. It all depends on your risk tolerance,” he said.

Sean Lusk, director commercial hedging division at Walsh Trading also provided a strategy that is both easy on the wallet and is a shorter time frame.

In an email to Kitco he said that he recommends buying the October $1160 call and the October 1,080 put, which cost about $400 each.

“This is purely a volatility play as October options expire on Sept. 24, leaving a week for a sizable move following the FOMC,” he said.

“Despite the Fed announcement tomorrow that will no doubt rattle commodity markets, it is largely seen as a one and done scenario should the Fed hike rates a quarter point,” he added. “I believe the proper course of action going forward is to have some exposure on both sides of the gold market into the FOMC.”

Courtesy: Kitco News


Key Words:  gold price   US rate hike