The market gives the Fed a 86.3% chance of hiking Wednesday.
CPI came in this morning, the odds jumped, and everybody’s got their answer.
I don’t think they’re going to do it.
But whether I’m right matters a lot less than the next bit, which is the reason I’ve been putting this same trade on every week for months.
Thirty-day options are pricing about a 16 VIX right now. The last two Fed days realized somewhere between 32 and 50.
I don’t need to know what Warsh does. I need the market to move, and it’s going to.
The option model wants stable volatility for a year. You look at all the prices in a chain and what they’re expressing is an assumption that the world carries on at roughly the same pace.
Then you stick a scheduled event in the middle of it where a new Fed chairman announces something, and the model has no good way to handle that.
So the options get a little more expensive going in. Not nearly enough.
Go Look At What Fed Days Do
I walked through the whole year on this, and the numbers get worse as you go.
The January meeting gave you about a 0.23% move open to close, which is nothing. March was around 1%. April was flat on the day, and then the market ran 3.5% over the next several sessions.
Then June. Range of 752 down below 740 in SPY, and a round trip of 3.62% in a single day.
Run that through the volatility math and you’re at roughly a 50 vol for that one day.
July was 2.23% round trip, which works out somewhere around 32 to 36.
And thirty-day options are sitting at 16.
Now For The Bit Nobody Expects
People get this wrong by assuming a hold means nothing happens.
Look at the column on the right of that chart. No change. And that did not equate to a no-change move in SPY at all.
Earlier this year everybody was expecting a hike going into the Iran conflict and didn’t get one, and SPY went up 3.2%.
No change can create a huge market move, and it makes sense when you think about who’s positioned for what. If 90% of the market is leaning one way and the thing doesn’t happen, every one of them has to do something about it in the same afternoon.
Which is exactly where we are on Wednesday.
Why I Think They Hold
They don’t need to raise. The bond market is doing it for them already, and that’s not my line, that’s Warsh’s. He said the bond market is doing the work for us.
The Europeans raised, and I don’t know that the Europeans have done anything right in 50 years, so I wouldn’t use that as a reason.
And this inflation is a different animal from what we’ve been dealing with. It’s oil-based, and the oil is about the Persian Gulf and the Iran conflict. That might last a month or six months or a year, but most people think it ends. That’s a different animal from the sort of inflation you raise rates into.
So I think he holds and I think the market is totally surprised. Things have been coiled up since the early August rally and this thing is looking for a reason to blow up on the upside.
The Reason It Doesn’t Matter Much
The structure, roughly.
You want to be flat going in with a position that pays on a move in either direction, so a put spread on one side and a call on the other, and the whole thing costs you a few dollars.
Then you look at what the actual moves have been. On the July meeting you got about a 1% rally and then a 2% drop from the top, and both of those are closable. The calls were up 50% on the day, and then you blink and the put spread is up 30%.
You don’t need a 30-point move. You need the 1% and the 2%, and Fed days have been producing both.
The trade doesn’t work if the market sits still and does nothing. But this is the most volatile meeting we’ll see this year, because it sets the tone for the rest of it, and the new chairman has gone out of his way to make sure nobody knows what he’s going to do.
Which makes it the granddaddy, and it’s Wednesday.
Everything above is the thesis. The live session is where the trade gets built.
On Tuesday, one whole day before the Fed, I go live inside Weekly Profit Cycles and put this position on in my real-money account. Members get the structure, the entry, and the exact names before I touch a single contract.
The offer closes at noon and the decision is at 2pm.
That’s your window.
Andrew Giovinazzi