Tuesday, August 5, 2008

More Fed Fun

I've mentioned using at-the-money options straddles on the index tracking stocks over Fed interest rate decisions, but today I wanted to see how an out-of-the money straddle would work. Since the decision is coming up in just 10 minutes, I've only had time to look at the SPY, the S&P 500 index tracking stock. Let's see how the following spread will play out:

SPY Aug132 Call, SFBHB: Buy at the ask = $0.27
SPY Aug 122 Put, SPYTR: Buy at the ask = $0.44
Total cost of spread = $0.71/contract

The Street is expecting the Fed to keep interest rates the same, but if there's even a whiff of a rate increase, I think the market will tank.

Let's see how this plays out.

No comments: