Over the last year inflation has risen to levels not seen in four decades. Although inflation numbers are slightly better at this time, the US Federal Reserve is still planning to raise interest rates and the risk of an overshoot and recession is still strong. How does inflation affect options trading when it is on the rise and how does it affect trading when it declines. The stock market views inflation as a silent killer of earnings over the long term. When the Federal Reserve becomes concerned and starts raising interest rates that can depress the market and options traders can profit.
Options Trading in Up and Down Markets
While the Federal Reserve raises or lowers interest rates in order to deal with inflation, unemployment, recession, and the possibility of recession, the market constantly tries to guess what the Federal Reserve will do next. Thus, chairpersons of the Federal Reserve often talk in “Fed Speak” which is a way to say what they want to say without spooking the market. That approach sometimes works and sometimes spooks the market. In the current era Federal Reserve Chair Powell is typically preceded in his talks by other regional bank presidents who say what the chair will say, then Powell says what he is going to say, and then more regional bank presidents say what it is the chair just said. In the current era that message is that the Fed will keep raising interest rates until the rate of inflation is down to the 2% range, that their decisions are driven by data as it arrives, and that there is likely to be economic pain before they are able to ease up on rate increases. What is happening in 2022 is what happens most times that the Fed goes about raising rates, the market guesses and is sometimes right and sometimes wrong. For investors this is risky because they can put money in the market and lose it or stay in cash and watch a rally from the sidelines. The beauty of trading options like we do at Top Gun Options is that we can profit from options trading in up and down markets.
The Prospect of a Recession and Options Trading
While long term investors may fret over the prospect of inflation eating away at their money long term, options traders are more concerned about how the Fed may overshoot and drive the nation into a worse-than-necessary recession before they wring inflation out of the economy. For very short term trades of a few hours to days, the times when the Fed minutes of the Open Market Committee are published, when the Chair speaks and announces rate increases (or not) are times when carefully hedged option strategies can profit from a whipsaw effect of market euphoria followed by panic or vice versa.
Reading the Factors That Drive Inflation, Fed Actions, and the Market
At Top Gun Options we have an acronym, DRINC. It stands for Democrats, Russia, Iran, North Korea, and China. The point is that events far afield can have outsized effects on world and US markets. Russia is engaged in a war in Ukraine, Iran is doing its best to develop nukes to attack Israel and anyone else in the Middle East who they do not like, which is pretty much everyone. North Korea is busy firing rockets and threatening its neighbors and China one day shuts down the country over a few Covid cases or says it intends to invade Taiwan, dominate the South China Sea and assume its natural role as world leader. Meanwhile the Democrats tend to spend like drunken sailors and cause things like the worst inflation in 40 years. At Top Gun Options we stay tuned to things like a virus coming out of China and make the call of a market crash to the day, printing money and making millionaires in our trading squadrons. Because we stay abreast of what will drive the market, we trade accordingly no matter if the market is headed up or down or fluctuating up and down. These are not good times to trade solo. Consider joining one of the trading squadrons at Top Gun Options and potentially print money no matter what the Fed, the Russians, inflation, or the Democrats do.