tw-rl

1/ The “Fed Put” 101 If you’ve been following the financial media, you may have heard @mcuban and @elerianm on @SquawkCNBC referring to the “Fed put” in the markets and its impact on asset prices. But what is the “Fed put” and how does it work? Here’s “Fed Put” 101!

2/ When people refer to the “Fed put” in the markets, they are making reference to a put option. As we covered in Options 101 (refresher below), a put option gives the buyer the right, but not the obligation, to sell an asset at a set price by a specific date.

Sahil Bloom @SahilBloom1/ Options 101 - Put Options Yesterday, I posted Part 1 of Options 101, covering call options. I can’t leave my Bears hanging (the market has done enough of that!), so it only feels right that I cover put options next. Here’s Options 101 - Put Options! twitter.com

3/ In this context, the phrase “Fed put” is used to refer to the notion that stock buyers believe they have an ability to sell their assets to the Fed at a good price at any point in the future. The Fed has been clear it will support markets, so the notion isn’t without merit!

4/ As @mcuban and @elerianm point out, this contributes to asset price inflation. Why? The Fed put acts as a hedge (downside protection!), allowing for more risk-taking to the upside. If you’re at the casino and your rich friend offers to cover your losses, you bet bigger!

5/ The “Fed put” isn’t new. It was originally called the “Greenspan put” - a reference to former Fed chairman Alan Greenspan, who first engaged in expansive asset purchases during the 1987 market crash. I would argue it dates back further, to the “FEDerico put” of 1500s Italy!

Sahil Bloom @SahilBloom1/ A Thread on Markets It is the year 1500 and you enter a market in Renaissance-era Italy. There are buyers and there are sellers. Prices of the various goods are determined by the interaction by and among these individuals. Now in walks Mr. FEDerico, a man of endless means. twitter.com

6/ Central bank market intervention is a controversial and highly-relevant topic. I hope this primer helps you feel more educated on the subject. With apologies to my Austrian economists, that was “Fed Put” 101! Please share and send any suggestions for future topics!