Yo, Pit Crazies,
There was a successful setup in 2022 that isn’t going away in 2023.
I’m talking about the moves in the S&P 500 into and around an FOMC announcement. (The next one is next week.)
Generally, traders think the Fed will cave … then J-Pow and co. turn around and do just what they say they are going to do: raise rates to combat inflation. That has sent the market into big selloffs.
What they don’t mention is excessive Federal government spending..
Here is how to tell when the market sets up like that.
A Known Date Is a “Known Unknown”
A little known truth about the option model is it has a hard time pricing one-day events.
Traders know this so they compensate by changing volatility for the days around the event. Folks that trade earnings events know this by the drop in option values post-event. These FOMC announcements have taken on similar pricing mechanisms.
The only unknown is what the Fed will actually do and how the market reacts post event.
Generally those moves have been 100 points either way for SPX 1-2 days post event.
Note how the sigmas per term are all different and are much higher just after the FOMC meeting. This is classic “Event Premium” or as Redd Foxx would say on Sanford and Son in the 70s “The Big One.”
I set up the trade in my Pro Class on Monday and will likely call a Code Green today for SPYMaster since the trade idea will ride the coattails of the FOMC announcement.
2023 is still looking like 2022 for now. As we saw last year, things can change in a hurry.
The Rundown
Nitro Trader
Mark bringing the mad gains with Alphabet Inc. (Ticker: GOOGL) Jan27 95 calls closed for
a 253% gain
Volatility Edge
Vol Edge goes out with a bang and the ProShares Ultra Short Term VIX futures ETF
(Ticker: UVXY) Jan20 10-5-1 put fly closed for a 49% gain
Cap Gains
A nice string of wins for Bill, Frank and myself with the SPDR S&P Biotech (Ticker: XBI)
Jan20/Dec23 85 call calendars, Petrobras SA (Ticker: PBR) Jan20 9/7 put vertical
closed for a 89% gain
To Your Trading Success,
AG