The growing consensus is how the Fed's options to stimulate the flagging ALL OF US economy are limited. But the markets happen to be extraordinarily volatile -- in part because investors have no idea what Bernanke will say on Fri.
So some investors are betting from the jumpiness, expecting markets to calm lower once Bernanke takes the podium from 10 a. m. ET in Jackson Hole to go over the Fed's options.
Tony Battista, Chicago-based Tastytrade controlling director, said the uncertainty that has powered certain trades in recent weeks -- increasing bond and gold prices and higher volatility - should fallout of favor once Bernanke has voiced.
"That's what we think about this particular news with Bernanke -- we'll whipsaw for any half-hour, an hour after he talks, but volatility? No matter what Bernanke states, volatility should get crushed, " he or she said.
He's betting the wild swings may decline by selling call options and put options within the PowerShares Nasdaq 100 ETF, or the actual QQQs, at a price above and below the present share price of $51. 83.
That trade makes money so long as the Nasdaq-100 stays in a variety, a bet on the gyrations associated with recent weeks subsiding.
Markets have been very difficult to read during the S&P 500's near 20% dive because the end of July. Taking a firm positions in front of Jackson Hole takes a strong belly.
Last time central bankers met from Jackson Hole Bernanke sparked a 30% rally in stocks within the following eight months by alluding as to the would turn into a $600 million bond buying program.
So far this week the S&P 500 is actually up nearly 4% while spot gold has tumbled a lot more than 5%.
The VIX closed on Thurs at 39. 76, suggesting investors anticipate the stomach-churning action will continue. Options activity may be frenetic in recent weeks as investors attempt to protect themselves against near-term gyrations within markets.
Anticipation of some sort of new policy prescription may be dampened, as many believe the Government Reserve has limited options after investing $2. 3 trillion in previous efforts to enhance asset prices and saying it may maintain short-term rates at near-zero via 2013.
Douglas Borthwick, managing director from Faros Trading in Stamford, Connecticut, says investors wish to stay positioned against the dollar. He's not expecting any great surprises through Bernanke's speech.
"We are advising clients to still short the dollar, inch he said. "The Fed has currently telegraphed what it's doing, that rates is going to be on hold through mid-2013. "
Lacking a new round of quantitative reducing, some traders are betting the Fed might sell short-dated Treasuries in support of the long bond in a bid to stimulate refinancing mortgage and lower other long-term borrowing expenses.
"The bond market seems to be pricing in that he will address it, " said Steve Luetger, mind of fixed income management at Mesirow Monetary in Chicago, which manages $57 million in assets.
Speculation Fed action may come as increased buying in long-dated bonds offers helped rally the 30-year bond.
"Some of the air might emerge from the Treasuries market" if Bernanke does not strongly signal more stimulus is not far off, " he said.
CALMER WATERS FORWARD
Some see the Bernanke speech like a pivot before calmer waters ahead.
"We're within an extraordinary time right now when individuals are demanding options in the very temporary... and that is completely different from what we have seen previously few months, " said Steve Location, a co-founder of options analytics organization InvestingWithOptions in Mobile, Alabama.
But Place thinks investors should slim against that through buying bearish "put spreads" within an ETF that invests in short-term contracts about the CBOE Volatility Index, or VIX, the actual market's favored gauge of anxiety.
The idea behind a bet about the iPath S&P 500 VIX Short Term Futures exchange-traded note is it profits if volatility declines in the near-term and rises a couple of months down the road.
"Regardless of the direction from the move tomorrow, there is a very heightened anticipation regarding what is coming up right right now. "
Battista also thinks investors should end up being going short government bonds and gold for their recent runs, and because the panic doesn't match the 2008 economic crisis, underscored by Berkshire Hathaway's $5 million investment in Bank of America.
"We don't believe it's a 2008 scenario - that is our feeling... and that got confirmed today by (Warren) Buffett buying (shares of) Financial institution of America, " he said.