Hedging bets on retail

June 10, 2015 09:44 AM

A buyer of Short Sep – Mid Curve call spread emerged earlier paying 1 for 50,000 of a 12.5 wide strike 99.125 – 99.25 call spread that would benefit from a return to a weak period of economic growth, continued low inflation and a stall in the pace of job growth. This option is more likely to expire worthless, though it would benefit from an expectation that the Fed would have barely moved policy rates from current 0-25 bps to only 50-75 bps. by the third quarter 2016.

If the retail sales report scheduled to be released tomorrow morning was to show that consumers were still not willing to spend from income gains, it would reflect a harsh view they have on the prospects for a lasting recovery.

Our base case is for a return to above trend growth and a further re-pricing in the front end of the yield curve for a Fed that is to begin normalization sooner. Two policy moves before year end seems entirely more likely than ‘lift-off’ not starting until 2016. Still, if one is well positioned for ff policy rates higher by 50 bps by year end, the above call spread shown is a good hedge against that position.

About the Author

Martin McGuire, managing director at TJM Institutional Services