Taking a bullish or bearish stance on the market with options

The FOMC announcement made on Wednesday did not come as a shock to anyone.  The committee elected to leave benchmark rates unchanged and maintained the current levels of quantitative easing. The determination to leave policies unchanged likely means the taper decision will be left to Janet Yellen. This outcome was entirely expected by the market as beliefs that economic data is still too weak to support a taper were reinforced by last week’s worse than expected unemployment number. Maintaining their target unemployment rate at 6.5%, the FOMC also decided to leave rates unchanged. Although the release did not specifically mention the U.S. federal government shutdown the uncertainty surrounding the economic impact the shutdown had was likely a consideration in the decision. With monetary policy remaining unchanged for now the question on trader’s minds is how to position themselves until the end of the year. Here we will look at two options strategies that will allow a trader to take a bullish or bearish view on the market with a clearly defined risk vs. reward ratio and a price target calculated using options prices.

Using the price of the December E-mini S&P 500 at-the-money straddle, we can see that the options market is implying a move higher or lower of around 64 points by December expiration. Using this implied move we can calculate an upside price target of 1,824 and a downside price target of 1,696. Using these targets we can now look at a bearish options play and a bullish options play.

Bearish Trade:
Buying the ES Dec 1720-1700 Put Spread for 4.50
Risk: $225 per 1 lot
Reward: $775 per 1 lot
Breakeven: 1,715.50

This trade allows a trader to take a bearish view on the market in a very capital efficient way. This trade also has a great risk vs. reward ratio.

Bullish Trade:
Buying the ES Dec 1800-1820 Call Spread for 5.00
Risk: $250 per 1 lot
Reward: $750 per 1 lot
Breakeven: 1,805

This trade provides a similar reward profile and is also a very capital efficient way to speculate on further upside in equities. Both of these trades are great examples of the power of options spreads.

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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