Trading the Fed Announcement – a 32% Gain!

Back on September 14th I wrote Trading the Fed Announcement. I looked at a possible SPY straddle option strategy structured with a SPY October 197 Call and a SPY October 197 Put. I felt a 5% move in the SPY could be possible, either in direct response to the Fed's announcement, or at least within a couple weeks following the announcement:

First, I had to think about the Implied Volatilities of SPY options. The mean IV of 20% was around the middle of the recent range, so the options weren't trading at a discount.

But then I looked at the possible gains and losses if SPY either gained or lost 5% over the next two weeks, and what would happen if the IV changed:

Let's jump ahead two weeks. On Tuesday, September 29th, near the close, SPY just touched the 5% loss level from the 9/14 open:

SPY's Implied Volatility, which had fallen off a bit during the third week of September, spiked up to near the 25% level:

Going back to the theoretical table of outcomes, the closest outcome is the one with SPY dropping 5% and the IV increasing to 25%:

So how did this trade actually turn out?

At the open of the 14th, the SPY October 197 Call traded at 4.21, and the SPY October 197 Put traded at 5.4. The cost to enter the straddle was 9.61.

Two weeks later, near the close on September 29th, as SPY hit the 5% loss level, the SPY October 197 straddle showed a gain of 32%, a tad better than the theoretical prediction of 26%.

If SPY didn't react sharply immediately after the Fed announcement, then SPY hitting the 5% upside or downside target within a few weeks after the announcement would be as much as one could expect. Another way to time a trade exit would be to target a 20 to 30% gain, and exit as soon as it was hit (time decay works against straddle trades, so you should target exiting as soon as possible).

Either exit strategy would have worked on Tuesday. Should someone still be in this trade, Thursday's SPY bounce was weak, and another downswing may provide another chance to exit with a profit before October option expiration.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2015 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com.

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