Higher yields are getting a bad rap these days. Yes, that means that money is not as cheap anymore but it also means there is additional confidence in the economy. Most importantly it creates an incentive in the financial sector for growth and investment. Brokerages and exchanges also benefit directly from a higher yield environment because trading activity increases and (in the case of brokerages) they are able to make more from customer deposits.
The CME Group (CME) is extremely well positioned to take advantage of increased volatility in interest rates. Interest rate futures are traded primarily on the CME’s exchanges and it’s their most actively traded products by volume and notional value. Volume has been picking up already and is likely to continue to rise, which will drive profits.
The growth that the CME has been able to experience in 2012 and the first part of 2013 is extraordinary considering the fact that the Federal Reserve was holding short term interest rates at zero. However, the “threat” of a taper has driven yield volatility back up which is exactly what they need to break out of this short term consolidation and hit new highs before earnings are reported on the first of August. We like entry now, but we would like to set trader expectations that there are likely to be big swings up and down this week as investors deal with the uncertainty in Europe and the kick-off of second quarter earnings season. Use a limit order and be very strict about your position sizing.
Use a limit order to ‘buy to open’ the CME Aug 77.50 calls for a maximum price of $3.00.
InvestorPlace advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.