Here's a strategy that's worked for me most Fed days. If you're permitted to short index options, specifically OEX options, short at or slightly in the money calls and puts about 15 minutes to 1/2 hour before the Fed announcement (right now I'm looking at the OEX 785 calls and 790 puts). Then buy them back about an hour after the announcement once the market's settled down. Why has this worked? Typically, volatility drops after the announcement and you're basically profiting from the drop in premium. The biggest risk to this strategy is if there's a violent reaction to the announcement, you can lose big time. This happened to me in the fall of 1998 when the Fed lowered rates in response to Russia, LTCM, etc. The market took off & while premium dropped, the move up was so big I lost a lot on the call side. If anyone's interested, I strongly suggest a 'paper trade' this time around so (a) you can see the dynamic at work and (b) this time around, the VIX has dropped about 20% the past few sessions and I've never seen that before; it usually goes up heading into Fed day (this worries me <g>). OTOH, there are only 3+ days left in this options cycle so premiums should be dropping anyway.
BTW, you can generally get filled between the bid/ask on the OEX options especially if you time your trades when the market isn't moving too much. Also, this may work on the NDX options although you need a strong stomach for the prices/bid-ask spreads there; haven't looked at the QQQs or HHHs. |
