Options Trading Strategies After The Fed Meeting

| December 18, 2015 | 0 Comments

options strategyOptions Trading Strategies After The Fed Meeting

Well, we can pretty much shut down for the year now, right?  Arguably the biggest event of the year has come and gone, and it’s time for holiday vacation.  No, I’m not talking about the release of the new Star Wars movie, although that’s certainly a huge deal to me.

Of course I’m talking about the final Fed meeting of the year.  It’s the one where the Fed was supposed to raise interest rates for the first time in nine years.

Guess what happened?

Yep, the Fed raised interest rates.  And… now we’re back to waiting around for the next big market moving news item.  It was pretty much as anticlimactic as one would expect.  I’m hoping that’s the opposite of what I’ll see at the premier of Star Wars tonight!

Before we get to what’s next, I wanted to remind you that I recently wrote an article on what options strategies you should avoid in 2016.  This is a good time to brush up on those bits of advice.

So what options trading strategies should we use now that interest rates are higher?

First, take a look at this chart of the S&P 500 $SPX over the last year:

chart of $SPX performance for the last year

The chart of the most important US stock index shows a big spike above the 50-day moving average after the Fed announcement this week.  The crowd obviously was pleased with the results.

However, the benchmark index is only up about 2% on the year.  That’s hardly anything to write home about.  The S&P 500 even looks to be trending down a bit these last couple months.

I’m not worried about a bear market in 2016 given the strength of the US economy.  However, we may be in for lots of sideways action over the coming months as the Fed assesses the results of the rate hike.

So what options strategies should we consider? 

For all intents and purposes, the Fed rate hike means very little for options traders.  That is, unless you happen to be a bond options trader.  Equities haven’t reacted all that much given we’re only talking about a quarter point hike.

The bigger news for options traders is the lessening of market volatility now that the big meeting is over.  If you were hedging against a long volatility move, you can probably decrease or remove that hedge entirely.

Here’s the thing…

2015 was a big year for volatility.  The average price of the VIX was higher than it’s been in years.  Uncertainty over interest rates was one of the leading factors contributing to the higher volatility.

Short-term volatility may be lower because of the initial rate hike, but there are still a lot of longer term questions.  When will the Fed hike next?  What’s the central bank looking at specifically?  Is inflation a concern?

As you can see, there are plenty of reasons to expect another extended period of elevated volatility.  But, since I don’t expect a major pullback in stocks, 2016 looks like another great year to write options.

Keep in mind, writing options in a high, but not too high, volatility environment can be a fantastic way to make money.  As always, just make sure you have your risk levels under control and a solid exit plan in place.  May the Force be with you!

Yours in Profit,

Gordon Lewis
Options Trading Research

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for Optionstradingresearch.com.  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Trading Strategies

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.

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