The market direction outlook for today was for the market to drift sideways as investors wait on the Fed comments this afternoon. While the consensus seems to be that the Fed will wait until next year to begin tapering their present Quantitative Easing program, investors remain cautious awaiting the announcement. Many investors are buying both sides of the S&P 500 through straddle or strangle option strategies.
SPX and SPY Options – Straddles and Strangles
Some are using the SPX options while others are using the Spy Options. Most of my investor friends who love this kind of trade stay with the closest options expiry which would be this upcoming Friday, Dec 21.
The volumes are interesting to view as you can see from the volume where a lot of investors are hedging their bets on the interest rate policies and tapering from the Fed later today. When valuations are considered, buying either side of the SPY through puts and calls makes a lot of sense although it is not a trade I would do. The returns though can be dramatic if the investors can jump out quickly enough when the market moves up or down depending on the Fed announcement. Considering the cost to hedge, while expensive as a percentage, it is still a reasonable price to pay to possibly double or triple the amount invested in the straddle or strangle.
Market Direction S&P 500 Intraday For Dec 18 2013
Most of the investors I know scale into their positions on a trade like this. They pick the levels of the market and scale into the call and put side depending on how the market direction in performing. For example at the open this morning they would be buying puts while in the later afternoon they would now be buying calls. They tend to buy in small lots and keep adding to their positions until they have the required number of contracts they wanted. For example if they knew they wanted 100 option contracts on each side (call and put) of the market they might buy in lots of 20 or 25 contracts and keep adding depending on the price they can get. This reduces their overall average amount which can assist in the overall profit if there is a big jump.
Profiting From The Emotional Roller Coaster
My own bet is the Fed does nothing different which could jump the indexes which is what my investor friends think will happen. On the other hand an announcement of a tapering to start shortly could dump the market quickly, which is another scenario my investor friends are ready for.
Whatever happens, these investors will be out within the first big move and not look back. They sell when there is still a sense of urgency among investors. These investors who trade announcements like today understand that stocks are driven by emotion. They love to profit from the emotional roller coaster that is often found in stock trading.
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