By: Tom Gentile
on January 31st, 2023
We generally don’t like to take a fresh option trade the day or two prior to the Fed announcement on Interest Rates. The market is pretty subdued with trading and there isn’t a real true trend going into the announcement and the price move is more flat than volatile so making a quick profit is tougher to find.
Then, when the announcement happens the markets will pop or drop or BOTH in the same last hour or two of trade, sometimes resulting in any options trades one had on the day or two prior to see gains and losses go back and forth and drive one nuts if they aren’t prepared for it. And not being prepared for it can result in one closing the option trade in all that back and forth and find out they got out prematurely.
Not only does this wild price action happen on the announcement, but the Fed Chair also usually speaks after the announcement explaining why the decision to raise or not and by how much if their was a raise in rates was made.
Its at that time the financial market analysts and money managers have to determine if the tone of the Fed commentary is dovish or hawkish, bullish or bearish, and based on that assessment they decide to either put their money to work or lighten their positions resulting in the markets selling off to a degree.
Rather than try and pick an option based on a market direction or instead of having to try and manage options trade you just put on while all this is going on can be a tough challenge for an options trader.
So why try to fight that battle. A consideration is to lay low and get a gauge of the Morning Report Lists and see where the activity is and maybe monitor or track the longer term to expiry options.
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