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Basketball, Options, and the Fed


We were in Atlanta this weekend for an interesting conference, attended by investment strategists, whose idea of athletic prowess would be to draw macro-economic graphs upside-down on drink napkins during a polite barroom discussion on economic policy.

Ironically, we were surrounded by thousands of enthusiastic basketball fans attending the NCAA Tournament whose idea of physical prowess was certainly who could spill the most beer on their college basketball jersey.

Our conference focused on the latest techniques in trading options, i.e., puts, calls, etc.  I don’t normally utilize options in my practice, except for “covered calls” to generate some additional income for clients with an income objective.  (I never use “naked calls” which can theoretically create unlimited losses for a client.)  However, there is one new strategy called the “Vertical Index Call Spread” that may be worthwhile for my clients, which I will be studying more.

I was more surprised by hallway conversations during breaks and lunches, which ignored options, focusing instead on the Fed and quantitative easing or QE3.  (I wondered if my profession was evolving from Fed-watching to Fed-stalking.)  More likely, the obsession reflected the fact that the Fed is meeting today (Tuesday).  Their report will be issued at 2:15 this afternoon and will likely dominate trading in the stock markets all day.

I don’t expect anything important from the Fed today, as their next forecast will not be until April.  They won’t make a big change in front of their own forecast.  Apparently, the stock market disagrees, as Dow futures are now up about 50 points.  If too disappointed by the Fed’s lack of action today, traders may lighten up their equity exposure this afternoon, pushing down the stock market before the close.

Most traders (short-term market players) are hoping the Fed will announce more quantitative easing.  You’ll recall this is the practice of the Fed buying  more bonds issued by the U.S. Treasury, lowering interest rates and injecting more liquidity into the market.  This invariably pumps up both the economy and the market over the short-term.

On the other hand, most investors (long-term market players) are less enthusiastic about QE, because they believe QE will only increase inflation down the road, especially with commodities like gold, oil, and foodstuffs, like soybeans and corn.

Of course, to all those howling basketball fans, I guess long-term only means the game goes into over-time?  The only inflation they’re worried about involves ticket prices and beer.  Frankly, they’re a lot more fun than investment nerds!

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