How can you get ahead in your options trades when the FOMC announces future monetary policy? Our guide will take a deep dive into trading options around these events and how to come out on top! Learn what FOMC announcements are (if you’re not familiar) and the best strategies for securing a profit when fiscal or monetary policy is about to change in either direction.
Quick Take: Why This Topic Matters
FOMC refers to a “Federal Open Market Committee,” a body within the Federal Reserve System responsible for setting up monetary policy within the United States of America. FOMC sets a target range for the federal fund rate (interest rates that banks use to lend to each other overnight), and these can have an impact on different interest rates in the economy, including mortgages, credit cards, or savings accounts.
Traders tend to care about FOMC as a factor due to the interest rates, but also because FOMC communicates its policy decisions and how they will conduct future monetary policy through official announcements to the public. Traders typically see these announcements as opportunities, especially when volatility is expected in the market due to the uncertainty of a future announcement.
Our guide will focus on the best plays traders can make around the volatility and opportunities immediately after FOMC announcements. Learn how you can use specific option setups to take advantage of the price swings that usually result from the FOMC communicating its future plans to the American public.
What Happens After an FOMC Announcement?
The market usually reacts to the policy decisions or statements delivered during the announcement. You see a few types of reactions from investors or traders, including an uptick in volatility when there’s an event like a stock market rally around a positive announcement, whipsaws, which are a rapid or unexpected reversal in price direction, or reversals of broader trends.
Possible Outcomes
- Rate Cuts—Rate cuts usually lead to reduced borrowing costs but are also a strong signal of increased economic activity. Rate cuts are usually seen positively and generally lead to higher stock prices.
- Rate Hikes—On the other hand, rate hikes are seen negatively because they mean that borrowing money and trading will cost more. Rate hikes are generally associated with market declines and a slowdown in economic activity.
- Rates Staying the Same—If the future monetary policy is unaltered when the FOMC announcement comes, the market usually tries to read into the tone of the announcement itself for clues on future market movement. A dovish statement suggests delayed rate hikes, which can be viewed well by most investors, while a hawkish statement can be viewed negatively as it indicates a future rate hike in many cases.
Expectations vs. Reality
Something to keep in mind is how much the FOMC’s action aligns with the pre-existing market expectations. The market will generally react positively or calmly when the FOMC announcement matches the expectations that investors had going into the announcement. This can be received so well that it could cause the markets to become even more stable or for traders to rally around certain stocks. On the other hand, if reality doesn’t match what the FOMC has announced, this can generate uncertainty in the markets and lead to significant market volatility.
Why Options Are Ideal for Post-FOMC Trading
Options are the best way to go if you’re dealing with trading around a FOMC announcement, especially in the aftermath of that announcement. They are a much safer and more flexible option than using stocks or other underlying assets outright, plus they let traders profit in multiple market scenarios.
- Limited Risk, Leveraged Reward: Traders can capitalize on big moves without full exposure as they would be if they were trading stocks straight out. They can place bets on where the stock price might go following the FOMC announcement, and their most significant risk is the premium paid to enter the trade. They can also control a prominent position with a relatively small amount of capital, which means they can enjoy a reward for a small amount of risk.
- Flexibility to Profit in Multiple Directions: It doesn’t matter what the outcome of the FOMC announcement might be. Traders using options can secure a profit in multiple outcome scenarios, including bullish, bearish, or sideways markets.
- Quick Expiration Trades that Align with Post-News Momentum: These are the best trades you can make around these announcements. If you can get the market direction correct and have the right trade set up to take advantage of the momentum from the announcement, you can make a profit and let the trade expire while the stock price is well above the strike price.
Brief Case Study
Trading SPY options after an FOMC day can be an excellent opportunity for options traders.
- The day following the FOMC announcement can be more volatile than the day of the announcement, so traders could use a strategy like selling a call credit spread, which is slightly out of the money. It would profit from a potential market day following the FOMC announcement.
- Straddles or strangles could be used to profit from volatility in either direction if there’s still significant uncertainty.
The 3 Most Effective Options Strategies Post-FOMC
Now, let’s look at three good options and strategies best suited for the events following the FOMC announcement. The straddle technique, direction debit spreads, and irons condors are three moves that would work well in bullish, bearish, or neutral markets.
1. Straddle (Long Call + Put at ATM)
This trade aims to profit from a significant price movement in either direction, making it a good pick for trading around FOMC announcements. It’s best for volatile markets, especially during times when significant price swings are expected.
- When to Use: The idea with the straddle move is to let the trader secure a profit, so long as there’s market volatility. Specifically, it’s when the underlying asset’s price moves considerably out of its breakeven points. This strategy is suitable when it’s uncertain how the market will go following the FOMC announcement. It can profit from bearish or bullish conditions that come in the aftermath. Use a straddle right before one of these announcements, and you’ll likely generate a profit.
- Risk Profile: The risk is limited to the total premium paid for the two options contracts (the long call and the at-the-money put). If the underlying asset is near the strike price by expiration, you will likely incur the maximum risk for the straddle strategy.
- Reward Profile: The long straddle has unlimited profit potential because the underlying price can move significantly above or below the breakeven points and could continue on forever.
Long Straddle Example
Let’s talk about a stock trading at $100 per share. The trader is anticipating a large price swing, but they’re unsure which direction the market will move the price. To set up a long straddle, the trader would first buy a call option with a strike price of $100 for a $5 premium and a put option for the same amount and at the same strike price. The total cost for the long straddle would be $10.
Let’s take a look at the possible outcomes:
- If the stock price rose well above the strike price to a level of $115, the call option would profit. In this case, the difference between the stock price and strike is $15, but you would have to subtract the premium of $10 per share ($1,500 – $1,000 = $500). The profit level will look slightly different in each scenario, but you’re looking at a $500 profit if the stock price goes $15 above the strike price.
- If the stock price falls down to $85 ($15 below the strike price of $100), the put option would profit. In this case, the difference between the stock price and strike is $15, but you would have to subtract the premium of $10 per share ($1,500 – $1,000 = $500).
- There’s the third option, which is the price staying near $100, in which case both the call and put would expire as worthless, and the investor would lose their premium of $10.
2. Directional Debit Spreads (Bull Call or Bear Put)
Whereas the long straddle is more focused on volatile market conditions following an announcement, where the trade can benefit from stock price going in either direction, directional debit spreads are a good strategy to use for traders who have a firm conviction on a particular market movement, either in a bearish or bullish direction.
- When to Use: This move is best for traders with a strong bias on direction based on Fed tone. You would use a bull call spread (call debit spread) when you’re feeling bullish and expecting the underlying asset’s price to increase. Use bear put spreads (debit spreads) if you’re bearish on the market following the FOMC announcement and see the underlying asset decreasing.
- Lower Cost: One of the main perks of the direction spread strategies is that they come at a much lower cost than buying naked calls or puts. At the same time, they also limit the risk and profit potentials, but they’re a much safer play all around.
Directional Spread Example
Let’s say that the trader or investor is expecting a stock to rise to $105 from $100 in the next few months, and the stock is currently trading at $100 per share.
To set up a directional spread, the trader would buy a call option on the stock with a strike price of $100 (cost of $5 per share). They would also sell a call option on the same stock at a strike price of $105 (cost of $3 per share). The trade costs $2 because of the difference between the two premiums paid to enter the spread.
Here are the possible outcomes:
- The investor can sell the higher-strike call if the stock price rises above $105. This lets them keep the profit. The highest potential profit is the difference between the two strike prices ($5) minus the cost of the trade ($2), which is $3 per share or $300.
- The maximum loss is limited to the cost of the spread: $2 per share for a grand total of $200.
3. Iron Condors (Neutral Strategy)
The iron condor does well in neutral or rangebound markets—it’s designed to profit when the underlying asset’s price stays well within the range of the strike prices that make up the trade. This one is good if you feel that the FOMC is announcing that monetary policy will remain relatively unchanged moving forward.
- When to Use: The iron condor is best to use if you’re expecting a muted response or chop, basically if you feel that the underlying asset’s price will remain within a specific range and volatility will be low following the FOMC announcement. The iron condor does well in a stable market scenario where the price doesn’t move significantly in either direction.
When using an iron condor, there’s an option where you can tighten or widen the wings based on implied volatility. Traders can roll the profitable spread of the trade closer to the stock price to collect more premiums, or they can widen the range if they anticipate a higher level of volatility in the options market. Adjusting the setup can help you maximize your profit potential.
We don’t want you to misunderstand the idea here—iron condors can do well when there’s market volatility. Still, it has to be short-term, high-IV, and is expected to dissipate quickly following the FOMC announcement.
How to Time Entries After the FOMC Decision
Timing is everything when dealing with trading around FOMC announcements and decisions. Follow these best practices to get the timing of your trade entries correct so you can take advantage of these monetary policy announcements for everything they’re worth.
- Don’t Rush: One of the best courses of action in this scenario is to wait 15–30 minutes after the announcement to clarify where the market sentiment is moving. That short window of time to observe what’s going on can provide much clarity.
- Key Levels to Watch: Leading up to the time of the FOMC announcement, traders should be keeping a close eye on the highs and lows of the market to observe a rough range of the possible prices you’re dealing with. The first candle range is another key level to watch, and it is a reference point for identifying potential support or resistance levels. It’s the range where you can view the differences between the highest and lowest prices on the first candlestick pattern.
- Using Confirmation: Use a wide range of technical indicators in conjunction with one another before entering your trade, before the FOMC announcements. A good combination would be checking the price with volume and options flow. It’s only good to proceed once you have confirmation from several indicators of which kind of trends are imminent in the market.
Common Mistakes to Avoid
Not only is it essential for options traders to correctly time their entries into trades surrounding FOMC announcements, but there are some common mistakes that traders make with these moves that should be outright avoided. We’ll address the biggest blunders traders make around these events and how to work proactively to ensure you don’t run into these problems.
- Trading Before Clarity Sets In—A lot of this can be attributed to lacking a defined trading plan, emotional trading patterns, or ignoring risk management practices. As mentioned earlier, traders should wait 15 to 30 minutes if they’re in doubt about what is going on to see where the other investors are moving before pulling the trigger on their trades.
- Choosing the Wrong Expiration—You’ll want to have your positions expire in the money, and this sometimes doesn’t happen because traders choose expiration dates that are either too short or too far out. For example, if you’re going for a volatility play, choose an expiration that is set for the day after the announcement.
- Overpaying for Premiums in High-IV Environments—Ideally, you want to enter trades when implied volatility is low, as high IVB can drive up options prices. You could be paying extra for trades when you don’t have to. Wait for times when IV is low to enter at a reasonable price.
- Not Managing Risk—When trading around FOMC announcements or any other notable market event, it’s best to prepare with sound risk management practices, such as using a small position size or setting stop-losses up to minimize potential losses.
Tools to Help You Trade FOMC Moves Smarter
Suppose you want to have success with trading around FOMC meetings or announcements. In that case, you’ll want to be equipped with the right tools to keep current on the current market conditions and the general sentiment amongst institutional investors. Check out how economic calendars, option chain analyzers, and other tools can make a big difference as you trade around FOMC events.
- Economic Calendars with Fed Dates—While there are apps that let you access this information, like TradingView or MarketWatch, you can also find the data on the websites of different financial institutions. Most notable is the Federal Reserve Board’s website, which includes all dates, statements, minutes, and press conferences needed to understand what is to come fully.
- IV Rank Scanners—These tools help options traders assess whether the current IV is high or low compared to its historical range. IV rank scanners can be found on broker apps like OptionStrat or ThinkorSwim, and they can be invaluable to options traders looking to enter trades at a reasonable price in low IV conditions and to know when a volatility play is warranted around an FOMC announcement.
- Option Chain Analyzers—You can find these tools on OptionStrat or ThinkorSwim, and they can be used to understand market sentiment or identify prime trading opportunities. Traders can use this tool to determine how institutional investors feel about the market direction going forward from the FOMC announcement.
- News Flow Tools—Traders can gain additional insights into market sentiment from news sources that keep them abreast of the changing market conditions. A few good sources include input from professional traders on Twitter or the alerts that can be used on the Bloomberg Terminal.
Our Playbook for the Next FOMC Day
The next FOMC day is June 17 and 18 of this year. While it can benefit some traders to wait for the announcement and trade in a reactive way once they see how the institutional investors are reacting to the circumstances, there are a few methods to prepare traders for this event more proactively.
“Trading Reactively” Strategy
Wait for the day of the FOMC announcement and then assess how the market reacts to the news. You can enter a trade or two based on the initial market movement, which could be sideways (neutral), a rally, or a dip.
The Proactive Approach
Take some time to see how the markets have reacted to these announcements in the past, well before the upcoming announcement. Based on what you find, you can begin setting up a trade to include the entry point price, the stop-loss and take-profit levels, and the expiration date. You could enter the trade right before the announcement, or you could begin it further out to avoid higher premiums that drive the stock prices higher, achieving a desirable entry.
Not Trading
Volatile market conditions aren’t the best for trading, especially those with limited capital, due to IV driving up stock prices because of uncertainty. Not trading lets traders focus on preserving their money and waiting to see what the markets do before settling down again. It might seem like you’re missing out; in this case, we’d recommend using a straddle for a volatility play, but you have to correct the expiration date to be profitable.
How to Manage the Trade Post-Entry
If you are a proactive trader, you will already have stop-loss and take-profit orders to place for your traders to preserve capital and lock in profits when desirable. Suppose your trade hasn’t become profitable yet, and some significant time value remains. In that case, consider rolling the position out to a further expiration date, especially if it looks like the market will turn around in your favor.
Final Thoughts—Be Strategic, Not Reactive
Turn Fed Day volatility into opportunity by using the right options and strategies, going into the announcement, and coming out from it! Remember to use straddles for announcements that could send the market in either direction, directional spreads to capture profit from bullish or bearish conditions, and iron condors to profit when the market conditions are stable. You can begin trading the news like a pro with some of these options setups.
Key Takeaways
- Don’t chase — plan and stay disciplined.
- Use options to manage risk and increase flexibility.
- Pick the strategy that fits the type of post-FOMC move you expect.
- Always backtest and use paper trading if new to these setups.
Our Final Take
If the Fed surprises with a hawkish tone, expect downside plays to outperform (e.g., bear put spreads).
Call spreads and straddles may shine if the market views the announcement as dovish or status quo.
