How to Trade Macro Announcement Days

What is the best strategy to trade on days where there is a government report or macro market announcement?

• CPI and FOMC report days provide ample price action and volatility to suit nearly all types of active traders.
• The expected volatility coming into an FOMC or CPI day is now just 40% of what it was in 2022 on average.
• 70% of the time, the actual price movement--from open to close--on a FOMC or CPI report day was less than expected, but intraday price action was plentiful for both buyers and sellers.

Among the most popular days to trade zero DTE options are those when the Federal Open Market Committee (FOMC) announces an interest-rate decision, or the U.S. Bureau of Labor Statistics (BLS) releases a consumer price index (CPI) report.

The FOMC report happens every six Wednesdays and is the day when the committee releases its interest-rate policy changes for the next cycle. Since interest rates began to rapidly rise at the end of 2021, FOMC report days have become the highest average-volatility days compared to other macro events with expected moves reaching 2x or more compared to an average market day.

The CPI release day, which is the first Tuesday of the month, is when the BLS releases its calculation for inflation during the previous month. CPI days have experienced roughly the same volatility seen on the FOMC report days. Since inflation has become ground zero for most market volatility since the end of 2021, it rivals the FOMC days for the highest volatility days of the market.

Both events create interesting trading environments for zero DTE options. Many of the FOMC and CPI trading sessions have experienced swings of up to 200-point in the S&P 500 index, combining bullish and bearish price action in one trading session.

If you are buying or selling zero DTE options on those days, there is no shortage of price action. The question is, what strategy do you trade? There is no single correct answer to this question, but we can provide some statistics that capture the volatility expectation going into one of those days and compare it with others.

Show me the statistics!

At tastylive, we backtested a study to observe the trend of the expected volatility for the day of the FOMC report. In this article we will share the statistics for the FOMC days, but it is important to know that the results and trend for the FOMC is nearly identical to the volatility trend for CPI release days.

First, we noticed that since the middle of 2022, when fear around interest rates and inflation was at its highest, the anticipated fear coming into the FOMC day is now just 40% of what it was. This means the market does not place as much weight on the announcement of the FOMC as it did before the rate of increase in interest rates and inflation has cooled.

And 70% of the time, the volatility expected by the options market going into an FOMC report day was larger than the market's actual movement from the open to the close. So, most often, traders who buy a put or call option in hopes of a blowout move to either the up or downside, lose money if they hold the option until the close. That is because the expectations placed on that option exceeded the result.

This does not mean trading intraday is unprofitable. In fact, intraday price traders have some of the best opportunities on FOMC and CPI days, because two-sided action is larger than average.

If you are going to trade on these big macro event days, consider fading the market expectation and trading a directionally neutral strategy, like buying a butterfly or selling an iron condor if you want to hold to the close, but don't be afraid to take a direction position intraday since there is a lot of action until the close.

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