Trading the Fed with Options
Anything above $108 will still be profitable, but the gains are capped until the options expire.
So what’s it mean about interest rates?
Well, this is a pretty sizable bet by someone that interest rates may drop a little, but not much by next January. You can imply from this trade that the Fed will at most, raise rates one more time (by a quarter point) before mid-January. This does in fact mesh with what most economists and traders believe. By the way, if IEF doesn’t move, the trader will still collect the $900,000 in premium.
I believe this is a very savvy trade. Barring some major unexpected catalyst, the Fed isn’t going to lower rates. At the same time, it’s highly improbable the Fed raises rates more than a quarter point. Your two likeliest scenarios are a quarter point hike or do nothing.
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