Last night the U.S. House of Representatives reached an agreement to reopen the partially shut down Federal Government and in turn averted a debt ceiling disaster. Now that the debate is over, is it time to buy the market? It’s important to consider the terms of the agreement in Washington and what catalyst we have on the horizon. The deal to avert hitting the debt ceiling was anything but comprehensive.
In fact, the agreement simply pushes the real debate further down the road and it is very possible that we find ourselves in the exact same position in a few months. With no problems actually being solved in Washington it seems more likely that markets will struggle to find direction as more uncertainty is ahead. Until then, markets will likely turn their attention back to the Fed and the question of tapering.
With a confluence of uncertainty a trader might want to position themselves for a choppy market ahead. Rather than trying to actively trade markets that are range bound, a trader can set up an options strategy known as an iron condor. An iron condor would allow a trader to profit from a choppy range bound market without any worries of being stopped out.
We will look at a trade in Mini Dow Jones Industrial Average Futures (CBOT:YMZ13). To set up an options strategy we must first develop targets. Looking at options in December, we can see that the market is implying a move of around 625 points by Dec. expiration. With Dec YM futures trading at 15,200 we can use this implied move to calculate upside and downside targets of 15,800 and 14,575. We can now set up a trade.
Trade: Selling the YM Dec 14,600-14,550 Put spread and the 15,750-15,800 Call Spread for 20 point Credit.
Risk: $150 per 1 lot
Reward: $100 per 1 lot
Breakeven: 14,580 and 15,770
This trade will profit within a 1,190 point range and has a trader short premium and short implied volatility. This trade also sets up for a great risk vs. reward set up.