Using Options To Trade Economic Activity

| January 9, 2015 | 0 Comments

Using Options To Trade Economic Activityeconomic activity

Typically, the most common catalyst behind market movement is economic activity. Sure, macro events, corporate earnings, and government policy can drive market action. But, it’s economic activity driving daily moves in stocks more often than not.

Part of the reason is because there’s simply so much economic activity to report. Think about all the economic news to discuss – jobs, housing, consumer spending, consumer sentiment, consumer and producer prices, durable goods, and of course, everything the Fed reports.

It’s a lot to keep track of, yet very important to understand. Well, at least it’s important to understand the major economic news. Items regarding the job market and inflation are key indicators. And nothing is more important than interest rates when it comes to economic activity.

So how can we use options for economic activity generated market moves?

Here’s the thing…

Economic activity impacts the markets in many ways. It’s a highly complex relationship, and unfortunately, not always predictable. So, instead of trying to find some secret formula for trading economic news, let’s just stick to the basics.

First off, it’s easy enough to just assume good economic news will impact stocks positively and vice versa. In that case, just trading S&P 500 options or S&P 500 ETF options is the easiest way to go.

Keep in mind, the S&P 500 is the most watched stock market index in the world. Major economic activity should be reflected in the movement of this key benchmark.

However, there’s possibly an even more accurate way to trade economic news.

Interest rates are often the best way to trade economic activity.

You see, nothing gets to the heart of economics like interest rates. And, in today’s world of ETFs, it’s easier than ever to trade interest rate products of all shapes and sizes.

One of the most popular interest rate ETFs is iShares 20+ Year Treasury Bond ETF (TLT). TLT options are heavily traded and very liquid.

Why TLT?

Well, US Treasury Bonds are the most traded and most sought after bonds in the world. As such, US interest rates are the most important. TLT measures long-term US bond rates, so it tends to be the most sensitive to potential changes in future rates.

In other words, TLT does a good job of measuring the expected impact of economic activity.

For options traders, TLT options are very popular methods to bet on the future direction of interest rates. Long-term rates tend to see bigger swings than short-term rates, so TLT options can be quite active during sensitive economic periods.

Moreover, interest rate products often cut through the noise you may find when trading stocks or stock indices. It’s not like you have to pay attention to earnings or CEO statements, or anything of that nature.

Here’s the chart of TLT:

trading economic activity, a chart of TLT

As you can see from the chart, TLT moved steadily higher through 2014 as it become apparent the Fed wasn’t in a hurry to raise rates. Keep in mind, lower rates mean higher bond prices – and a higher price for TLT.

Whether you use S&P 500 options or interest rate ETF options, like TLT, there’s plenty of methods for using options to trade economic activity. However, my two suggestions are the most straightforward way to do so.

Yours in Profit,

Gordon Lewis
Options Trading Research

Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com. You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

 

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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