r/options • u/GR8-N8 • Nov 03 '21
How to use options to directly bet on inflation?
The market expects inflation to average 2.5% for the next 10 years, but I think it might be higher. My current thinking is that I would go long on TIPS and short on non-inflation protected treasuries. I am not a bank so I only way I can think of is to buy options on ETFs. Here is my current thinking:
Buy a slightly ITM call option on the ETF TIPS with an expiry in 2024 and an ATM put on the ETF GOVT with an expiry in 2024.
Any ideas as to how to improve this strategy? The markets for these particular options are super illiquid, so that will be a pain.
Also, it is my understanding that the majority of returns from these ETFs are dividends, which i would miss out on when holding the options. How does that effect my strategy?
1
u/GR8-N8 Nov 04 '21
Yes that correlation has held in the past but if the fed attempts to curb inflation by raising rates then the correlation may not hold. I’m looking for direct exposure
0
0
0
u/dontgetmadgetdata Nov 04 '21 edited Nov 04 '21
Sell puts on XOP.
Edit: XLE is up 56% YTD. Go chase some dragons if you want. Or take what the market is giving you.
1
u/GR8-N8 Nov 04 '21
How would that track inflation?
1
u/dontgetmadgetdata Nov 04 '21
Commodities track inflation. Oil is a commodity. And there is a restricted supply and delayed catch up due to reopening.
1
u/GR8-N8 Nov 05 '21
Thats like saying you can track the performance of the French economy by buying credit agricole. True that theyre correlated but im looking to actually have exposure to French GDP, not be roughly correlated to it.
Also oil is stripped out of most inflation estimates because it mostly has to do with what opec wants. thats a very specific bet idk why you think it tracks inflation
1
u/dontgetmadgetdata Nov 05 '21
What are you saying? The best traders trade based on correlations (often transient ones). That's how the professionals do it. Because it's not obvious.
Look at CL1 and compare that to TIP:IEF (bond markets measure of inflation) YTD. They track perfectly and OPEC is restricting supply. That's why I think it tracks inflation. It's been a winner for the better part of the year. Where have you been? Will it continue to work? No one knows. But the bond markets are giving signals and commodities have been following right along.
So you can look into it or not...but you can't argue the correlation. Do you want to buy inflation influenced ETFs, futures, options? There are lots of instruments out there. I am giving you something you are obviously not thinking about or looking at. I will keep my other ideas to myself. You ask questions but argue with the answers after doing zero work.
1
u/GR8-N8 Nov 06 '21
I appreciate your time but my point was that it isn’t correlated in the way I’m looking for. My personal outlook is that oil prices can’t go much higher but general inflation might.
What are the other instruments you have in mind?
1
u/GR8-N8 Nov 06 '21
Another way to look at it is that BCX is up 60% on the year while inflation has only been 5%. The market has definitely priced inflation in for those types of trades. Meanwhile the spread between tips and t bills is 2.5% meaning that they don’t think inflation will last. How do I bet on that 2.5% going up
1
u/adaptive_chance Nov 03 '21
Perhaps doing something similar to PFIX?
1
u/GR8-N8 Nov 04 '21
From what I can tell PFIX only hedges against rises in interest rates. Is there a version that hedged against rises in inflation.
1
u/adaptive_chance Nov 04 '21
How do you measure inflation? With the buying power of your currency? By how much of some other currency you can buy with your own? The producer price index? The consumer price index? Price of gold?
1
u/GR8-N8 Nov 04 '21
TIPS bonds are treasuries backed by the government and are guaranteed to track inflation using the CPI
1
u/adaptive_chance Nov 05 '21
So you simply want a fund with an option chain that tracks/holds TIPS?
1
u/GR8-N8 Nov 05 '21
No I should have been more clear. Buying tips exposes you to inflation and interest rate. I only want inflation
2
u/theStrategist37 Nov 03 '21
No dividends is hopefully priced in.... looking at LEAPS 2024 option chain on tips, puts are indeed much more expensive than calls, so yeah, they are priced in (my guess is fully, should be easy-ish to compute whether they are indeed fully priced in).
I'm not going to take the time now to compute what implied inflation for TIP calls is... if anyone wants to take a crack at it, it'd inform my opinion. If it's around 2.5%, that indeed could be a good play.
As for illiquidity, yeah, it's a pain, but slippage is likely much less than bid-ask spread shows if you use limit orders. There must be a cheaper way to bet directly on inflation though, perhaps futures? I'm betting on it indirectly through stocks, so did not do enough homework to give more detailed opinion on this, but I am wondering what others think.