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One trader has a strategy to win big from the Fed's rate ping-pong match

One trader has a strategy to Win Big from the Fed's Rate ping-pong match

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One trader has a strategy to win big from the Fed's rate ping-pong match



One trader has a strategy to win big from the Fed's rate ping-pong match



One trader has a strategy to win big from the Fed's rate ping-pong match

One trader has a strategy to win big from the Fed's rate ping-pong match... What it is?

Well, One trader has a strategy to win big from the Fed's rate ping-pong match ...so here it is below.

The markets remain confused after Federal Reserve chair Janet Yellen's Friday morning speech at Jackson Hole. However, one trader is making a bet in case a rate hike becomes more likely.

Todd Gordon of TradingAnalysis.com sees a possible interest rate hike on the horizon, and believes that certain sectors are set for some big moves.

"The sectors that are responding the most are those interest rate sensitive sectors," Gordon said Friday on tv  "Trading Nation." These include consumer staples, which Gordon believes are in danger of a move to the downside should the Fed follow through on its hints to hike rates.

"Right now, it looks like the markets are starting to price in a Fed rate hike," he added. "If interest rates move up, that means the interest rate-sensitive sectors like XLP should move to the downside," Gordon said, referring to the exchange traded fund (ETF) that tracks consumer staples stocks.

Yellen said that "the case for an increase in the federal funds rate has strengthened in recent months," but pointedly refused to set a timetable for a possible increase of the federal funds rate target.

The XLP did see a drop following the Fed chair's speech as the markets attempted to decipher her words. Since it offers a dividend yield of nearly 3 percent as compared to 2 percent for the S&P 500, the ETF is relatively sensitive to bond yields. The ETF holds stocks such as Procter & Gamble, Coca-Cola, Philip Morris and Altria.

Looking at a chart of the XLP, Gordon determines that the ETF is on its way down. He looks at a previous drop from $56 to $54 to determine that the recent highs of $55 could go down by the same $2 different to $53.

Looking at the XLP chart, you can see how well this has been traveling in an upwards trend. So far so good, but we think there could be more downside to come, if this rising support line BREAKS  over the next few weeks, and the FED KEEP up this PRESSURE talk about the INTEREST RATES!.  That could be a likely scenario and a good trade to watch for. 

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As a result, Gordon wants to buy the October 55-strike puts and sell the October 53-strike puts for $0.81, or $81 per options contract. Gordon's trade has him risking $81 to make a total of $200—a whopping 147 percent return.

"If XLP moves back above the $55 mark, I want to cut the trade, protect any premium that's remaining, and move on to the next trade," said Gordon. "But otherwise, we should be able to go down to the $53 in the face of a potentially increasing interest rate once this Fed ping-pong match is over." -    Source : Cnbc.


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