How to Position for the Fed

Andrew Giovinazzi

Yo Pit Crazies,

With March 4 set as the Federal Open Market (FOMC) meeting date, it’s hard for VIX to drop too much and even harder for other implied volatilities to take the plunge.

Why is that … and is there a trade?

Yes!

VIX Measures 30-day IV, Not 5-Day IV

Trading options involves trading volatility to some degree … and VIX is not the end all or be all of volatility.

The key implied vol here is really next week’s cycle because the expected move is likely to be very high.

This is similar to an earnings cycle trade, when it is hard for IVs that expire after earnings to drop too much.

Usually the IVs hold up at least until the date.

I set up a trade for Option Pit Mentoring below.

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OP Mentoring Trade Template SPY 04.27.2027

Identify the conditions:

Learn to use price, volatility, and time to set up trade ideas:

The key volatilities for this trade are the May 06 puts at 33.22.

Normally, this is very high vol but the Fed will release meeting minutes on May 4. That should hold the IVs until then, similar to an earnings play in an equity. SPY realized vols are looking for a 10-point move in SPY from now until April 29 expiration.

Overall, my outlook is weakness in SPY with periods of spikes higher.

Find the Edge:

When one volatility is more expensive than another …

The volatility edge is selling April 29 and buying May 6. Realized vol RANGES are closer to 2% in SPY is 1.5%

Set Up the Position:

Create a real position based on the edge you see …

But-to-open two SPY Apr29/May06 410 put calendars for 3.15, buy-to-open one SPY May 6 425/435 call spread for 3.60

Identify the Risks:

Upside risk is around $100 if SPY blows out on the upside and same if SPY crashes below $400 on the downside. VEGA risk will eat up one day of decay per point drop in IV.

Describe the Financing Mechanism:

As traders we need to know how to pay the theta (RENT) …

The trade is theta positive.

Trade Management Strategy from Beginning to End:

The trade needs an outlook on management from open to close within the standard deviation of expected move …

On a spike move to 435, I will close the call spread in SPY and evaluate the put spread based on the IVs at the time. On a SPY move down, I want the SPY put spreads for a close early at 410.

I might sell Monday options if the April 29s expire worthless.

The Rundown

Capitol Gains w/ Frank Gregory

My open Exxonmobil Corp (Ticker: XOM) is running up 50% with a free call spread shot into earnings.

Pro Trading Room:
The Pro Room is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me during the entire trading session.

Cat takes some shekels off of the table.