Tapering, Tapering, Tapering is all over the news. Tomorrow we will know for sure if there’s going to be tapering going on.
This is could be a phenomenal event, or not! If you look back in May, when all this taper talk started, people have mostly sold the market off their positions. So one wonders if there’s any action left to do but buy again! OK wait, not tomorrow… the US Federal Reserve will come out with the decision to taper, tomorrow, but you can do several trades today.
Here’s what I am planning to do with my existing holdings.
I have a covered call position on the stock BHP. It is in credit (meaning I profited when the market went down), since the US market all declined today, there is a good chance it will also go down, so I am going to look to take profit based on my system.
There is a chance the tapering could happen (arguments later!) so I may keep the covered call. The risk is that the prices may rise tomorrow and my profits will be limited. However, it is holiday season so there is a seasonal tendency for prices to decline when positions are closed for holiday. This is my belief, so I feel that if the price runs away from me, it will go back down close to my entry price. So that’s what I will be monitoring.
On the other hand, when the tapering does not happen, the upside potential is huge. Meaning, we can all have a Merry Christmas and Santa will be early! I am going to buy an out-of-the-money call option, but I admit, the profit-taking will have to be done quickly, as mentioned due to positions being winded down for the holidays. Options will be expiring tomorrow (at the Aussie market) so the options could be cheap, meaning it is a low-risk, high-reward opportunity.
Now, why would the US Fed NOT taper…. let me count the ways…
1. They said they are data-dependent and they’ve long mentioned inflation target of 2% and unemployment at 6.5%. The economy might be getting stronger BUT the numbers they are looking at are nowhere near the target. That is crystal clear to me.
2. Head of US Federal Reserve is retiring. The replacement will be announced this week — Janet Yellen, the nominated Chair is an advocate of QE ( read: no tapering yet) and in her Senate confirmation hearing, she said the economy is performing FAR from it’s best, so I see no tapering there, at least not tomorrow.
3. Christmas season, it’s going to dampen the holidays, i.e. the consumption and spending that goes with it, that is 70% of the economy, so yes, the US Fed is mandated to support the economy and are not going to want to be on the Naughty List.
Alright, that’s all. The sun comes out, tomorrow!
