Did the FED Blink?
24th January 2008
Could the fed have been forced to blink because of a massive unwind of a fraudulent trade at a French bank? This is shaping up to be some of the -strangest of times in the market that we have ever seen. This huge 900 point rally in 72 hours should be used to take any bets off of the table. If anyone insists on having long exposure, the best bet would be to buy the farthest out ITM Leap Call. I can think of no better trade than selling your stock and replacing it with a call. If you don’t want to sell for tax considerations, buy an ATM Leap put. There is one certainty in today’s market. Volatility is here to stay. If there is one thing I learned after 15 years of option market-making is that you always want to be short options during low volatility times and long it in high volatility times. NOT THE OTHER WAY AROUND! Investors who think that because volatility is high that you should be selling options do not get it. Option selling implies that you are taking the risk. During these times you want to reduce your risk by buying options.
The bond market got clobbered today and yields soared. The 30yr Bond was down 3 5/32 by the 5:00 p.m. electronic close. I think a belief is setting in that interest rates don’t have much farther to fall. The curve flattened significantly.
- BA