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Serge d'Adesky
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Serge d'Adesky was born on July 30, 1955. He holds a B.A. in Political Science from Yale College and an M.A. in International Economics from the Johns Hopkins School of Advanced International Studies. He is the President and Cheif Financial Advisor of Northstar Strategic Investments, Inc., a... More
My company:
Northstar Strategic Investments, Inc
My blog:
Great Investment Strategies
  • How To Use Options To Play The Fed Decision 0 comments
    Dec 17, 2013 5:40 PM | about stocks: SPY

    The Fed meet today and tomorrow to determine whether or not they will begin "tapering", a euphemism for ending the $85 billion of money printing they have been doing every month in a desperate attempt to revive the sluggish US economy. Most economists believe inflation figures are too low for the Fed to begin tapering this month, but a full 34% of those polled do see an immediate tapering, according to a Dec 6 Bloomberg poll.

    My own opinion is that the Fed will punt, postponing the decision for another month, given the very low levels of inflation recorded to date. Consider it a Christmas gift to the stock and bond markets.

    But I'm not confident enough to bet on it! However, I'm more certain about uncertainty, if you'll pardon the cheap pun. I foresee a continued increase in uncertainty or volatility, peaking tomorrow afternoon at the time of the Fed statement.

    This presents the following opportunity, which is delta neutral - in other words it doesn't care in which direction stocks move - to make money. It should only lose money if uncertainty stays stagnant or drops between now and tomorrow and if the price of the index remains stable, moving only in a tight range.

    The Opportunity

    • Probability : greater than 70% (my odds, not mathematics!)
    • Risk : Reward : around 1 to 7
    • Duration: 2 day trade
    • Minimum Investment: $37
    • Maximum Investment: none

    For those with higher margin options accounts, I suggest a reverse calendar play with December and March options on the SPY. (Not the $VIX, contraintuitively.) This gives you more ability to manage the trade throughout the decision.

    For those with limited margins or options trading ability, I suggest a reverse iron-condor, buying out-of-the-money calls and puts and selling further out of the money calls and puts at the same expiration date.

    For those interested in the finer details of this trade, more data is available to registered members on my trading blog, The service is free for an initial 2 month trial period.

    Sorry for the delay in publishing this, but it's not too late to get into the trade on Wednesday morning, as long as volatility has not peaked too much. At the time of writing volatility levels for SPY were around 15.8%. I would not enter into this trade if volatility is above 17%.

    Disclosure: Options investing is inherently risky. This is not a solicitation to buy or sell. Please read our full disclosure on this site.

    Disclosure: I am long SPY.

    Additional disclosure: Actually I am both long and short SPY, in the form of a reverse calendar.

    Stocks: SPY
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