November 4th, 2022

Fed Pushing For Higher Unemployment To Reduce Inflation

I may need to make an addendum to a previously released article. I said Twitter would be dead in six months, but I’m not sure it will last that long.

As new CEO, Elon Musk is reportedly asking managers to work 12 hours a day, 7 days a week, or get fired. This is an attempt to rally the troops around a tight deadline to entirely overhaul the social platform and have a re-release party, or whatever the goal is. It doesn’t just apply to managers either. Employees have been asked to work extra hours without discussion of comp time or additional pay. Some estimates are coming out that 50 to 80% of the workforce will be gone.

Sadly, it’s not just Twitter that is facing pressure. Amazon (AMZN), and Lyft (LYFT) also announced layoffs and/or hiring freezes amid the tech slowdown and the Fed’s persistence to reduce inflation, even at the risk of a once red-hot job market.

What’s interesting to me is that yesterday’s jobless claims came in at 217k instead of the 222k expected. We’re hearing of companies taking a pause on hiring, but the number of layoffs hasn’t increased that much. The 4-week moving average only ticked up by 0.25k. That is causing an issue for the Fed.

The Fed said unemployment needs to be at least 4% to slow down inflation.

That’s what makes today’s employment situation report so important. The consensus is an increase in the unemployment rate to only 3.6% and a reduction in average hourly earnings by 0.30% from last month’s report. We’re getting closer to the 4% threshold, but not gaining ground quickly. That means pushing out the timeline of the potential end of the bear market.

That also means the politicians running on a campaign of job creation are proposing the exact opposite of what the Fed is trying to accomplish.

Using the SPY, our near-term short targets for a potential reversal at 363, 354, and 345. Of course, 345 would mean re-testing the recent low of 348.11. I’ll update targets if we pass each of these.

So, let’s see if we can find a short-term bearish trade.

I’m looking at the iShares MSCI Japan ETF, which has a ticker of EWJ. It’s been in a downtrend for over three months.

As a spread trader, I want to sell a call against the underlying because I believe the ETF will continue down, but if I sell a call outright, I would have an unlimited loss potential. As the stock goes up, I’m obligated to buy back the shares I’m selling short. To reduce my risk, I am going to buy a call, higher than the call I’m selling and will use that as insurance in case the stock climbs higher from here.

I’m going to construct the trade by selling the $51 call and buying the $52 call as insurance.

Prior to the market opening, the 16 DEC 22 51/52 call spread is going for $37 per spread, with a max loss of $63 (the difference between the strikes, which is $1, minus the credit received).

Now, a $37 max profit may not seem like a lot, but this is a very liquid ETF so you could easily bump up the number of contracts to 10 and look at a potential max gain of $370 and a max loss of $630.

I’d set a profit target of 65-80% of the credit received, meaning you’d buy back your position when the spread is worth $13 or less. If the trade goes against me, I’d get out when the trade has lost 100% of the premium received. In other words, if I collected $37 per spread, I’d set a mental stop loss to get out when I could buy the spread back for $74.

Now, if you don’t know a lot about spreads, but want to learn how you can grow your account in a volatile market using tactics that give you a higher probability of winning trades, I invite you to join Options Testing Lab. 

We officially kick off Options Testing Lab Tuesday, November 8th. Options Testing Lab is part training and part live trading. We’ll start with my Tuesday live trading session and then on November 10th, you’ll have the first session with Registered Financial Advisor and options educator, Haley Bjorklund. That’s right. Every week you get two live sessions that include training and trading.

We’re going to teach you all about options, including credit spreads, and show you how to implement what you learn in a live trading session each week. You’ll also get access to our brand-new social trading hub, where you get to ask questions and interact with fellow Options Testing Lab traders.

Haley and I would love to see you in the Options Testing Lab.

Go here for more information 

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Jeff Wood

Editor, Filthy Rich Dirt Poor

Trader, Options Testing Lab