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Fed’s Zero-Interest Rate Pledge Zaps Market Volatility

Last week’s Federal Reserve announcement of three more years of its Zero-Interest-Rate Policy (ZIRP) has pushed an already-low-volatility environment even lower.

According iVolatility.com, 20-day historical volatility (7.44%) made a new 52-week low on Friday. There was a great deal of chatter in the media about the Volatility Index (CBOE:VIX) closing below 18 for the first time seven months.  However, based on current market conditions, the VIX is still relatively overvalued.

Stutland Volatility Group feels the Fed’s move to push out low rates into 2014 will drive investors into more-risky capital allocations. We believe this is why the market has found renewed buying on any dip. The resilience has been quite astounding. The S&P 500 (^SPX) has closed well off its lows on the seven down days this January.

One other technical observation: take a look at the VIX chart below; this down-draft has occurred after a major double-top formation. This is worth noting as we move through the year. The Fed’s printing press, coupled with ZIRP, could keep realized volatility low for the better part of the year. This in turn would put downward pressure on implied volatility.

STRATEGIC OPTIONS PLAY: SBUX Put Spread

(Updated Feb. 7)

Last week on Bloomberg’s “Three vs. Trish,” we highlighted a way to collect some yield with the intention of picking up SBUX at a better entry price.

With the stock trading at $48.41, a market participant could sell the SBUX April 46-41 put spread for 72 cents. It is important to point out that this is more of a cash play than a leverage play. When comparing this trade to outright ownership of the stock, one can see another advantage to this options play.

STOCK/INDEX SBUX

STOCK PRICE $48.41

OPTION PLAY Sell put spread

SELL / MONTH / STRIKE / PRICE 1 April 46 Put @ $1.03

BUY / MONTH / STRIKE / PRICE   1 April 41 Put @ 31 cents

NET CREDIT ($0.72 x 100) = $72 credit


Article printed from InvestorPlace Media, https://investorplace.com/2012/02/feds-zero-interest-rate-pledge-zaps-market-volatility/.

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