Regardless of whether people agree with the Fed’s decision to leave its $85 billion per month asset buying program unchanged, it was pretty easy to see that the market thought it was time for a taper. Leading up to the release of the Fed statement, the market saw net speculative short positions in Treasuries at the highest level in the past three years. Those traders were run-over by the surprise news from the Fed. The market was also telling us that equities were most likely going to fare well if a taper was announced. The CBOE S&P 500 Volatility index (VIX) saw net speculative short positions at an all-time high. The market was as prepared for a taper as it was ever going to be and the decision from the Fed came as a total shock. It is likely that markets will remain choppy until we get some information about the taper. It is easy to get chopped up in a sideways market, and most products won’t give a trader the opportunity to profit from range bound markets.
Options on futures would allow a trader to collect premium in a market that is in a consolidation phase. Until we get more information on the taper, it seems that conditions like this will persist. What type of strategy would a trader use to take this view on the market? A trader could us a strategy known as an iron condor.
Here’s how it sets up.
Trade: Selling the ES Oct 1660-1650 Put Spread and the 1730-1740 Call Spread for a 3.75 Credit.
Risk: $312.5 per 1 lot
Reward: $187.50 per 1 lot
Breakeven: 1656.25 and 1733.75
This trade profits in a very wide range and all other things held equal will profit more with the passing of time. If a trader wanted to profit in a choppy market, this trade is a low risk way to do so.
Click to enlarge.