Dour Fed Reserve Comments Generate Quick Profits

Market Summary

The December 12^th Investor Report mentioned "...The rest of the week should be interesting from an investor perspective as there will be a lot of headline news and don't be surprised if we get a trend change (either up or down)...Also, next week there is a Federal Reserve meeting and the week ends with triple-witching day on Friday – the end-of-quarter simultaneous expiration of stock index future, stock index options and stock options for December. All bets are off concerning where prices might end the week as we should expect high volatility heavy trading volume..." The stock market reacted negatively to the comments from today's Federal Reserve meeting. Investors apparently expected the Fed to mention the possibility of additional quantitative easing. Instead, the Fed issued a tepid statement basically saying they are standing pat without any significant policy changes.

Investor Analysis

The December 12^th Investor Report also said "... the bulls and bears appear to be engaged in a tug-of-war...For example note in the SPY daily chart below how the index has traded range-bound between $123 at support and $127 as resistance. Also, note in the chart how it has stayed close to its 200-day SMA which is acting like a magnet and keeping the index from going much higher or lower than this level...when prices start to pull back towards the $123 support level, the bulls step in to buy and squeeze the price action back up towards resistance..." As noted in the SPY chart above the index price has already dipped back down to the $123 support level. The rapid price drop would have generated a quick, easy profit if one had used trade mentioned in the 'Strategy' section down below

Possible Strategy

The December 12^th Investor Report said "... many traders are considering credit spread trading strategies to take advantage of the non-directional nature of the current market price action...selling an out-of-the-money (OTM) stock or option and protecting the position by simultaneously purchasing the exact same investment, but even further OTM. For example, selling a January $132 strike price SPY call option for .63 (Yesterday's closing price) and simultaneously buying the January $139 at .13 would generate a .50 credit premium to the investors account multiplied by the number of shares represented by the option contracts..." As mentioned above, stock prices dropped again today and the value of option spread in the example above dropped to approximately .05. Now would be an opportune time to close out this trade for .45 per share profit (getting .50 on opening the trade minus .05 paid out on closing the trade). Sign up for the http://blog.theoptiontrader.com for additional option trading strategies.

By Gregory Clay