Excell with Options: Trading FOMC events with Wednesday Weekly options
Report highlights
Rich Excell explores the flexibility of Wednesday Weekly options and how the contracts can give traders ways to optimize their reward to risk trades amid increased volatility in the 10-year yield.
Image 1: 10-Year U.S. Treasury Yield Relative to the Federal Funds Discount Rate
Ten-Year U.S. Treasury yields are a powerful tool in any investor’s toolkit. This one yield can signal so much because it digests a range of information and in turn, influences every asset class there is. Some may hold the theory that the 10-year yield is essentially the accumulation of expected short-term yields over the next 10 years. Looking at an overlay of U.S. 10-year yields and the Federal Funds discount rate, one can see the link where the market begins to anticipate changes in the Fed Funds rate and moves before the Federal Reserve actually changes short-term rates. With so many discussions about when and how much the Fed will ultimately cut (or hike), there has been a bit more volatility in the 10-year yield this year.
Image 2: ISM Purchasing Managers Survey vs. ISM New Orders to Inventory ratio vs. 10-Year Note futures
Headlines were focused on the move lower in Treasury note yields given the lower-than-expected ISM Purchasing Manager Survey. Not only was the market worried about growth slowing much more than expected, but it was also focused on the new orders to inventory ratio, which has leading properties with the index itself. Comparing each to the 10-Year Note futures, one may see that this index has some leading properties with yields. I show this by inverting the price of the generic front-month Treasury Note futures. This slowing ISM data may be suggesting lower yields and higher prices in the futures if past patterns hold.