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The effect of economic stimulus and interest rates changes on options trading.  

19 January 2008

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Following the November official interest rates announcement by the Federal Reserve in the USA the options markets range traded until the December announcement. Reductions in interest rates have the effect of stimulating the economy, however stories from various sources began to surface of greater problems in the Sub Prime Lending arena and Stocks became less buoyant.

Leading into Christmas the “Santa Claus” rally failed to materialise and the markets then commenced seeking direction from Ben Bernanke (Fed Chairman). The Federal Reserve was not scheduled to make any further announcements until the end of January and the markets were prompting the Federal Reserve for an earlier announcement.

As trading moved into 2008 the Sub Prime rumours escalated and the market began to react negatively as the rumours crystallised as fact and companies announced poor fourth quarter performances and large debt write offs. The sharp negative trend led both President Bush and Mr. Bernanke to comment that stimulus of the economy was to be addressed promptly.

President Bush advised that he would release the part of the State of The Union Address relating to Economic Stimulus early. On January 18th. rather than wait until later in the month. Mr. Bernanke did not stipulate whether he would bring forward the Federal Reserve announcement due at the end of the month.

Whatever the President’s Stimulus outline and Mr. Bernanke’s decision is - the futures market is sure to react and the movement in the indices will provide us opportunities to set new options trades with a pleasing variety of strike prices in our spreads.

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