Business-Insider

by John Jagerson 9/17/2007

Panic in the streets is what I expected after Friday's news about Northern Rock. But, inexplicably, the only market that seemed really affected was the GBP. In the mean time, we have a major lender in the UK going out of business and blaming credit market issues arising in the US. I would have expected stocks to get beat up at least a little. This event leaves a big stinky question laying out there about how many more legitimate lenders and banks are going to have to be bailed out before this crisis is over?

Like most traders I talked to, I suspect that the lack of volatility is due to the imminent Fed announcement tomorrow. However, in my experience, volatility doesn't just go away. Most of the time, it lies waiting in the shadows and unwinds suddenly once the market is past the distraction. That is what I am expecting following the Fed release tomorrow. This is great because it gives us a chance to prepare.

On Friday, I reevaluated my stops and placed hedges against my portfolio holdings in the forex where appropriate. This is good but any time I am expecting volatility another trading opportunity arises that can be quite profitable. In this case I am referring to using options on a currency pair. Right now, I can buy a call and a put on the EUR/USD that has the potential to provide a nice profit if the market breaks out either direction. The key, of course, is that the market will have to move big but losses are generally kept to a minimum as the two positions offset each other to a certain extent if the market doesn't move anywhere.

I prepared a webinar on this strategy that I had posted earlier but if you have not seen it you might find it interesting. Click here to access it:

http://www.pfxglobal.com/index.php?o...508&Itemid=136
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