Market Overview

The Fed Raises Rates: How You Could've Played It

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  • Last Wednesday, the U.S. Federal Reserve raised interest rates for the first time in a decade.
  • After seven years close to zero, rates were boosted to range between 0.25 percent and 0.50 percent.

After seven years of near-zero interest rates, the U.S. Federal Reserve decided to raise them last Wednesday, to range between 0.25 percent and 0.50 percent. Federal Reserve Chairwoman Janet Yellen argued that a small surge in interest rates “is now appropriate,” adding that the decision reflects the Fed’s “confidence in the U.S. economy,” which seems to be “on a path of sustainable improvement.”

What A Rate Hike Means

In a recent article, Time writer Taylor Tepper explained what the rate hike means for people. For bond investors, it’s not very good news. Basically, “Bond prices fall when market rates rise,” he explained. Chris Cook, president of Beacon Capital Management added, “The majority of your total return comes from the yield, not price changes (…) Your rising income payouts will soon make up for any price drops.”

For savers, the panorama is quite different. “We view the Federal Reserve’s decision as an unequivocal positive for both long-term investors and for savers,” analysts at Vanguard assured.

How You Could’ve Played A Rate Hike

Many are wondering: How could I have played a rate hike? Binary options might've made sense.

What Are Binary Options?

Trading via binary options is just that: Playing a binary event. “Binary options are limited risk contracts based on a simple yes/no market proposition like will the markets go up by the end of the trading week,” binary options trading site Nadex explained.

Trading A Rate Hike Via Binaries

A classic Fed Funds Rate Binary Option contract may be: Fed Funds Rate <= 0.25 percent.

Related Link: How Are Corn And Soybean Prices Doing? Here's A Way To Play These Commodities With Low Collateral

For traders thinking the new target rate would stand below or at 0.25 percent, buying this Binary Option could have worked.

For those thinking the new target rate would be above 0.25 percent, selling this Binary Option would have been a reasonable strategy.

But there was still another way to play the event, using US 500 binary options based on the E-mini S&P 500 futures. The U.S. equity market was expected to move -- one way or the other -- in response to a decision by the Federal Reserve this month.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.

Posted-In: NadexLong Ideas Options Federal Reserve Markets Trading Ideas

 

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