How has the market reacted around meetings of the Federal Open Market Committee (FOMC) and are there trading opportunities around the meetings?
Our first study was conducted in SPX (S&P 500 Index) from 2009 to present. We examined the returns leading up to the FOMC meeting until 2 days after the meeting. A table showed that before and after an FOMC meeting the percentage change in the SPX was very similar to any normal 2 day period.
Our second study focused on implied volatility (IV) and its reaction to these events. Would it be profitable to sell option premium in the form of one Standard Deviation Strangles? We tested selling strangles in TLT (Bond ETF). All the Strangles expired after the meetings. We sold strangles with less than five days to expiration (DTE) and also 45 DTE. A table compared the average P/L, probability of profitable trade and the sum of Profit/Loss on these trades. The 45 DTE Short Strangle was more profitable in every metric as compared to the 5 DTE Strangle. We ran the numbers using the same criteria for SPY and the 45 DTE Strangles did even better in comparison there.
Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the important takeaways and what our studies tell us about trading around an FOMC meeting and the relationship it has with volatility.
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