The Best Way to Trade FOMC Days

Have you ever noticed the uncanny resemblance between FOMC and FOMO? The extreme volatility makes it an enticing day to trade, because you know if you could just flip a coin and manage to play the right side there’s potential for large gains. But the reality is: Fed Day is notoriously difficult to trade, and your usual strategy and technical analysis are not as effective on these days. If you choose to trade, this is one of the days that is best to use Event Contracts because you are accepting your risk up front. Whether you’re buying 1 contract or 50, you know that the money you spend on the contracts is your max risk.

Let’s explore this further…

Characteristics of FOMC Price Action
Oftentimes the price action is virtually untradeable. You’ll see consolidation before the announcement, and then rapid bi-directional swings that start at the time of the Fed Announcement and then again during the Powell presser.

Drawbacks of Trading Options or Futures:
• On equity options, premiums are so inflated that it’s tough to position into a reasonable strike price. Most of the more cost-effective contracts are unreasonably out of the money.
• On Futures, your risk isn’t capped – and it’s hard to get in and out of a trade when the markets experience high volatility.

Why Event Contracts Are the Best Product for Event Days:
• Event Contracts give you a fixed risk / fixed reward way to participate in the markets.
• You can buy as many contracts as you want to decide how much exposure you want to take on.
• We know that event days usually have big trading ranges and high volatility, so our R-R is really favorable in this situation because we can go roughly 20 pts out of the money and buy contracts under $30 that could settle at $100. If the trade works out, the reward is favorable. If it doesn’t, your risk is capped – and you are far less likely to jeopardize your account the way you would trading other products.

Best Opportunities to Position In:
• While the market is in sideways consolidation mode before the FOMC announcement.
• When the first big move happens, you can buy contracts under $30 in the opposite direction that have potential to close out at $100 if they are in-the-money at the end of the day. These bi-directional moves offer good opportunities to position into lower risk / high reward contracts. You can trade one direction or use this strategy to position into a strangle.

As enticing as Fed Day may seem with its potential for large gains, the reality often proves challenging for traders. The extreme volatility and unpredictable swings of FOMC price action make it a daunting to navigate using traditional trading methods. However, if you want to take a trade – Event Contracts offer a fixed risk and fixed reward approach to participating in the markets. With Event Contracts, traders can maintain control over their exposure, knowing that their risk is capped, regardless of market fluctuations. So, the next time you’re eyeing FOMC as a trading opportunity, consider trading or even hedging with event contracts.