Wednesday, February 15, 2006

The Bernarke Wednesday

I hate gossip. I prefer facts.

Problem is, people are almost invariably ignorant of facts but are well informed of all kinds of gossip.

This is why I rarely read news (too little of it is factual) and I never talk about it. I am sure this is at least somewhat surprising and I'll offer an explanation at some point when I detail my strategy. However, today I'll make a rare exception:

So, the web is abuzz (is that a new word?) with talk about new Fed's chairman Ben Bernarke's speech due out sometime today. I won't go into my feelings about the Fed and its policies - we all have our views that in the end amount to nothing useful. What I will say though is that it is intriguing how much attention this "event" is gathering from every financial mogul.

The interesting fact is that unless he utters something radical, Mr. Bernarke has an amazing lack of control of how his speech is going to affect the markets. Understandably, this has nothing to do with his ability as the Fed chairman. It has everything to do with too many human beings paying too much attention to another human being speak. Consequently, a neccessary observation is that his speech is likely to move the markets in a significant way - at least in the short term.

How do we game this?

It depends on what one is trying to do:
  • If you are a stock trader then you'll probably fade the immediate move that results from the announcement. I imagine Oil and Housing will be affected the most. Since the downside in both is limited in the short term (I am still a bear cub in Oil - in the intermediate term) a selloff will be buyable. A rally in these sectors will be tougher to trade and I recommend to stay away. If you are a bull and need a reason to get long, this isn't it.
  • If you're an options trader then you're likely waiting for expiration to "just get here already" and aren't too concerned with making more money right now. Keeping what you've made is plenty. This is a tougher position especially if you're short ATM gamma like we are. Recommendation: do nothing. It's a hard advice to follow but that's the only way you'll have odds on your side.
  • If you're an options trader and are trying to make money then sell ITM options after the initial move. Essentially you will become a stock trader and collect the most time premium you can get on top of it.
We belong to the second and third category. Good luck all.

Cheers,
/Dmitry

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