Spread Trading Nasdaq vs S&P500 when Jerome Powell increases interest rates?
As an example of how to use monte carlo methods for valuing options with multiple stochastic factors, here we consider the impact of Jerome Powell and the FED's decision to increase interest rates and its impact on the Nasdaq vs S&P500.
Trading Hypothesis: If interest rates rise, technology companies valuations will be impacted worse than the broader stock market. Why? You should complete your own historical analysis on market analysts’ deflation on valuations of different company sectors based on historical rate hikes.
This is not investment advice! But let's say I do my research and I conclude: Technology companies are more sensitive to interest rates due to the influence of current DCF valuations based on the expectation of high growth rates in free cash flow in the future.
Ask yourself, how could I benefit from this view?
In this video we explore how you can either take a position in the e-mini Nasdaq-100 and the e-mini S&P500 index futures or equivalently take a short position in the spread options on the indices. We value a spread option using multiple stochastic factors, the Nasdaq and the S&P500, using monte carlo simulations.
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00:00 Intro
01:44 Benefiting from market view
04:20 Equity Index Futures Spread Trading
08:45 Valuing Equity Index Spread Options
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