Suppose that you believe that recent strong employment data (~ 180,000 jobs added in November!) together with the prospect of a tax cut for corporations and wealthy families means that the Fed will start to increase interest rates sooner and faster than it has indicated in its recent open market committee meetings. However, you don't know whether: 1) the bull market in equities since summer 2009 will continue to charge ahead because of increased household incomes and consumer confidence; or, 2) will experience a major downturn because of investors' fears that higher interest rates will discourage corporate spending on physical capital and will kill the real estate rally. You notice that neither call nor put option premiums on at the money strike prices on the S&P 500 index have changed noticeably from average levels for at the money premiums on the index over the last year.
a) Describe an options strategy that you might wish to apply that is consistent with your expectations.
b) What assumption are you making about the volatility of S&P 500 stock prices " implied" by the current level of option premiums on the index?