Stocks are sitting near all-time highs, getting a boost from last night’s Apple earnings which impressed Wall Street with better guidance.
As for me, I’d say the options portfolio is looking healthy…
(Start getting my alerts in real-time and stop hearing about these trades after the fact, sign up today)
While earnings have been the big talk (SQ, QCOM, and CZR report this evening) for the last two weeks, the attention switches back to the economy this afternoon when the FOMC has their policy meeting at 2 PM.
Now, no one is expecting them to raise rates at this meeting. However, we’re all interested in the language they use to describe the current economic environment, as well as, their outlook on rates in the future.
For some this might sound boring…but I’ll tell you this…
It pays to know how the Fed moves
You see, through its actions, the Fed has the ability to manipulate interest rates and influence market sentiment.
Not only that, but over the years I’ve found that my money pattern (check out the “Bonus Section” in Option Profit Accelerator) works especially well with the iShares 20+ Year Treasury Bond ETF (TLT)… in which I love trading options on.
(Every trader has one or two symbols that is always good to them, TLT is one of them for me, here’s my current position in TLT. If you’re ready to start receiving my alerts in real-time click here)
That said, I think there will be an opportunity to trade TLT after the FOMC announcement. Read on about my trade idea, as well as, my in-depth preview of the upcoming FOMC announcement.
It’s that time again… Fed day. The Federal Open Market Committee (FOMC) will tell us about its economic outlook and give us clues as to where interest rates can be headed. (Spoiler alert: rates aren’t going higher.)
Now, the market is expecting interest rates to remain at 2.25 and 2.50%. However, traders are pricing in a 2.5% chance of rates actually being cut by 0.25%.
Just because the market is expecting the FOMC to leave rates unchanged… it doesn’t mean Fed Chair Jerome Powell and other voting members have it easy.
You see, there have been a lot of data points since the FOMC last met. First, we saw strong U.S. GDP data – hinting at slowing inflationary pressures. Additionally, we’ve seen strong jobs numbers. That said, the Fed will have to cautiously navigate between improving growth rates and softening inflation pressures.
With this meeting, the Fed will likely continue its dovish stance and remain patient. You see, given the current economic environment, the Fed’s current monetary policy is appropriate.
So what are we watching for with this FOMC meeting?
- The Fed to leave rates unchanged.
- Questions regarding the U.S. President’s tweets about cutting interest rates.
- Policymakers to be at a standstill with some looking to tighten interest rates.
- Inflation has actually weakened, and it’s below the FOMC’s 2% target rate.
- Growth has accelerated.
- The FOMC to comment about inflation (the language of their statements will be important)
- Fed officials to reference remaining “patient” regarding interest rate hikes or cuts.
Now, when it’s Fed day, I like to look at the iShares 20+ Year Treasury Bond ETF (TLT) for potential setups.
Trading Around A Dovish Fed
If you don’t already know, bonds are heavily related to moves in interest rates. Now, if interest rates rise, bond prices tend to fall. In turn, bond ETFs like TLT will drop. On the other hand, when interest rates fall or remain the same, bond prices will tend to rise.
That said, around FOMC meeting announcements and press conferences, there’s usually a trading opportunity in TLT… if you know what you’re looking for.
For example, last week, I sent Weekly Money Multiplier clients my trade idea in TLT.
Now, I was stalking TLT for about a week at the time… and I started to build a position just as TLT was hitting the lower end of the Fibonacci retracement.
Keep in mind, TLT doesn’t move a whole lot… so a small percentage move in TLT could mean a big winner in options.
Here’s a look at the hourly chart ahead of the Fed.
TLT is right near my target price of $124… and just 2 days after I got in, there was a bullish crossover (blue line crossing above the red line) – indicating TLT could run higher, which it did.
Not only did TLT trade set up on the macro front, the technicals also confirmed the move. You see, just that small move in TLT caused the options to go up by more than 60%.
Lastly, if you need a refresher on options trading, feel free to download my ebook 30 Days to Option Trading eBook. It will get you up to speed and where you need to be to start trading options.