Taking advantage of Fed tapering uncertainty

Yesterday’s trading session saw the release of the much anticipated FOMC minutes as markets sought clues on when the great taper might happen. The Fed minutes did show that there is strong support for the taper happening this year should economic conditions continue to strengthen. Most of the committee members agreed that while changes in the asset buying program are not yet appropriate, they would be comfortable with slowing the pace of bond buying later this year. While the minutes did not point to any specific timeline for tapering the consensus expectation is for an announcement of tapering at the next FOMC meeting in September. The minutes also pointed to some committee members concerns over rising rates as a potential strain on economic growth. Markets reacted sharply to the release of the minutes, rallying to new highs before taking out the session lows and closing down on the day. Today’s rally in E-mini S&P Futures erased yesterday’s losses and could be a sign that markets will continue to be choppy until the next FOMC meeting and announcement of whether a September taper will happen.

So how can a trader profit in a potentially range bound and choppy market? Simply buying or selling the underlying will not allow the trader to capture profits in market that has no direction, but using options strategies can allow a trader to capture premium and profit in a range bound market. Using the at-the-money straddle in E-mini S&P 500 futures options we can see that the market is implying around a 50 point move in the underlying by September expiration.  Using this information we can establish a range that the underlying is likely to stay in through expiration. With futures trading near 1650 we can calculate an upside target of 1700 and a downside target of 1600. Selling vertical spreads at these targets sets up a strategy known as an Iron Condor. An Iron Condor profits within a range and is established for a net credit. Let’s break this down.

Trade: Selling the /ES Sep 1600-1595 Put Spread and the 1700-1705 Call Spread for 1.75 Credit

Risk: $162.50 per 1 lot

Reward: $87.50 per 1 lot

Breakevens: 1598.25 and 1701.75

While the reward to risk ratio of this trade is not ideal, this trade profits in a huge range and allows a trader to capture premium in a potentially range bound and choppy market.

Click to enlarge

About the Author
James Ramelli

James Ramelli is the Moderator of the Live Futures Options Trading Room at KeeneOnTheMarket.com where he actively trades futures and options on futures while educating members on strategies, setups and risk management. He has a degree in Finance with a focus in Derivatives Trading and Financial Engineering from The University of Illinois and has been trading for five years. James appears regularly on Bloomberg T.V. and BNN and writes a weekly column for Futures Magazine.

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