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Markets Rally Post-Powell’s Balanced Remarks at Jackson Hole
Simpler Trading Team
Is inflation truly receding to the point the Federal Reserve (Fed) will back off its hawkish attack to curb higher costs?
One economist doesn’t think so, and is warning stock market participants to check their enthusiasm because inflation may come back stronger.
Fed Chairman Jerome Powell this week stated that the “disinflationary process” has begun but will take a long time.
Fed actions last week raised the federal funds rate by 25 basis points and a string of “Fed speak” public events followed, and neither promoted confidence among stock market participants. The .25% increase was the eighth increase since March of last year. This boosted the federal funds rate within the target range of 4.5%-4.75% and the Fed goal is to get core inflation down to 2%.
Despite all central bank efforts core inflation hasn’t budged much, and that is a problem, according to a top economist.
Mohamed A. El-Erian, President of Queens’ College, Cambridge University and an advisor to Allianz and Gramercy, believes there is more complexity to upcoming inflation than what many investors realize.
He has publicly stated that there is a 75 percent chance that inflation will remain elevated or rebound to 40-year highs from last year.
“This would force the Fed to choose between crushing the economy to get inflation down to its 2% target, adjusting the target rate to make it more consistent with changing supply conditions, or waiting to see whether the U.S. can live with stable 3-4% inflation,” El-Erian stated in an op-ed for Project Syndicate earlier this week.
El-Erian sees the inflation issue as “sticky” where the Fed must keep up its tactics while waiting to see if inflation will come down. This could lead to inflation getting stuck at 3-4% over the second half of the year, he stated.
Overall inflation has fallen from its 9.1% peak last June to about 6%, but questions remain if Fed actions will pull inflation back down below 3-4%.
This complex inflation equation ahead is encouraging traders to focus on more complex trading setups.
Traders are leveling up in this choppy, uncertain market with setups such as the butterfly spread.
The butterfly spread is a sophisticated and potentially profitable options strategy that can help maximize returns in a range-bound market. This setup is not for the faint of heart – properly executing a butterfly spread requires a high level of accuracy and a solid understanding of the underlying principles.
A butterfly spread involves simultaneous purchasing and selling options with three different strike prices. It is named after its butterfly-like shape on a profit and loss diagram. The butterfly is typically shaped like an upside-down “V” with the two outer strike prices making up the wings of the butterfly and the inside strike prices being the body – the most profitable part of the butterfly.
Options trades using a butterfly spread are typically held until expiration and are used to profit from a specific price range or a neutral outlook on the underlying asset.
There are two main types of butterfly options: call butterfly and put butterfly. A call butterfly involves the purchase of two short calls sold at the same strike price, one long call purchased below the short strikes, and one long call purchased above the short strikes. A put butterfly has the same configuration, only using puts instead of calls.
Butterfly options can be used to profit from a specific price range or to hedge against potential price movements in the underlying asset. They can also be used to generate income through the sale of the options. However, they also carry the risk of loss if the underlying asset price moves unexpectedly or if the options expire out of the money.
There are important concepts to understand before getting started with a butterfly spread. Here are terms to know:
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