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By: Costas Bocelli — April 16, 2020

How the Fed Just Handed US A 1,593% Return

While millions of Americans eagerly await the stimulus checks from the U.S Treasury, readers of Profit Skimmer, my options trading service, have been creating some "stimulus" of their own.

And we have the Federal Reserve to thank for this latest round of stimulus hitting all those brokerage accounts.

And a juicy check it was indeed, one that delivered a +1,593% annualized return!

You see, one of the recent trade ideas I sent to my readers had everything to do with the extraordinary measures the Fed has been taking to save the economy during the coronavirus crisis.

Here are some of the important actions that the Fed has taken in just the past six weeks:

  • March 3rd - Fed makes an emergency 50 basis point interest rate cut (1-1.25%).
  • March 15th - Fed makes another emergency rate cut, effectively taking short-term rates to to the Zero bound (0-25%). Fed restarts asset purchases (QE) to buy $700 billion in Treasuries and agency mortgages.
  • March 17th – Fed backstops commercial paper and money markets to keep credit flowing.
  • March 19th – Fed balance sheet rises to $4.668 trillion, surpassing the peak from the great 2008 financial crisis.
  • March 20th – Fed steps in and buys municipal bonds and local debt.
  • March 23rd – Fed goes all-in, announces QE is open-ended with no limit.
  • March 31st – Fed extends its "repo" facility with other major central banks to support global dollar liquidity.
  • April 9th – Fed announces new $2.3 trillion lending facility to support small and medium-sized businesses. Fed intends to buy investment grade and high-yield corporate debt.

Truly this has been a monetary response on a massive scale indeed.

In total, the cumulative actions could provide more than $6 trillion worth of liquidity to the financial system and to businesses.

But it was that last action on April 9th that handed us the juicy stimulus check.

On April 3rd, I alerted my readers to buy a bull vertical Call spread in the iShares Investment Grade Corporate Bond ETF (LQD).

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If you’re unfamiliar with LQD, it tracks the performance of more than 1,000 high quality U.S. corporate bonds in a single fund.

The ETF was under some serious stress in mid-March. So much so that the Fed was compelled to step-in and buy shares of LQD directly, in order to stabilize the investment grade corporate bond market.

In other words, there was an implied backstop at the time.

With that in mind, and knowing that the Fed would likely step-in again, a bullish bet on LQD looked like a good bet to make.

Shortly after publishing the trade alert, LQD soared on the official announcement on April 9th that the Fed would actively buy investment-grade and high-yield corporate bonds.

So the backstop actually turned into an explicit action, as corporate bond purchases were added to the monetary stimulus mix.

And then just like that... kaboom!

Barely 11 calendar days later, the Fed handed us a big fat stimulus check.

The trade generated a +1,593% annualized return.

The trade generated $480 in cash for every $325 invested.

Anyone who invested $3,250 into the trade saw $4,800 fly back to their brokerage account.

That’s $1,550 in cold hard stimulus cash.

Now here’s the thing…

Market volatility remains relatively high.

The CBOE Volatility Index (VIX) is still pushing north of 40 so that means we should still expect to see daily moves of 2% to 3% in the major stock market averages.

And here’s the good news…

My vertical spread strategy is tailored made for this kind of market landscape.

The vertical spread is extremely versatile in its construction.

You can profit from the upside with bull spreads...

You can profit from the downside with bear spreads....

Heck, there is a way to profit from a vertical spread even if you happen to get it slightly wrong.

And best of all, every vertical spread trade is fully-hedged, so there is never an unexpected loss greater than you’re willing to risk on any one trade.

So how about it… Got options?

Costas

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