By: Steve Smith
Six or eight weeks ago, Chairman Powell came out and said that he wasn’t even “thinking about raising rates.”
He meant that the Fed was committing to keep rates low for a long time.
Then last week he one-upped himself when he said that he wasn’t “thinking about raising rates. We’re totally focused on providing the economy the support that it will need. We think that the economy will need a highly accommodative monetary policy, and the use of our tools for an extended period, and we’re absolutely committed to staying in this until we’re very confident that that is no longer needed.”
In short, the Fed is promising to keep rates low, continue to print money, and make sure the market is flooded with liquidity for “an extended period.”
For us, this is good news and bad news.
All I will say about the bad news is that this could lead to some unfortunate ramifications for consumer prices and the purchasing power of the dollar. Of course, we need to deal with the crisis in front of us, and that is the COVID Recession.
It is a shame that the Fed and the government didn’t work harder to normalize rates and the Fed’s balance sheet when they had the chance…
But, we can’t change that now. We have to deal with the situation at hand.
The good news for traders, like us, is that this will undoubtedly lead to lots of volatility.
Think about this, had Powell said, “We are committed to normalizing rates and shrinking our balance sheet as quickly as l possible,” the market would have fallen off a cliff before he finished the sentence.
So anything Powell says will create an inordinate response in the market. And that goes for any news story or bad earnings report…
Or anything that might put investors on edge.
And the opposite is true as well.
Basically the market will be hyper-reactive to the upside and the downside. That means we can ride the volatility to once in a lifetime profits!
The trick is to make sure you hedge your trades properly. The volatility can pay us well when we are on the right side of it, however, it can punish us if we are on the wrong side with a naked position.
NEVER trade naked positions. You can make a little more money when you are right, but you can lose everything if you are wrong.
Remember how I lost $50,000 on my first personal trade because a merger was canceled on the day my options expired? Had they waited one business day to announce that the merger was off, I would have been fine.
However, as it was, I lost $50,000…and at the time in my life, I couldn’t afford to take that kind of hit.
Now imagine that situation, only multiplied by 10, because of 0% rates and unheard of amounts of liquidity injected into the system.
Make sure to always cover yourself.
To Your Success,
P.S. Because we focus on high probability trades with well-defined downsides, my Options 360 portfolio is up 29% year to date. Considering the S&P is up .4% YTD, I’d say it makes sense for you to grab a trial membership to Options 360 for just $19.
Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.