To The Moon

FOMC meeting will hold today(Nov.2), leading the market for the next month

Before that, we are on a market,

1. Mixed Q3 earnings, which is half-passed. The "strong manufactering and weak tech" is the reflection of current risk appetite.

2. Strong economic data and inflation is the basis for interest rate increasing. But Most of the economic data are lagging.

3. Recession expectations are strong, strong US dollar further makes overseas money return.

4. The Fed is actually behind the inflation curve,However, the market is looking forward to easing. The latest update of the Atlanta Fed's econometric model suggests that the average federal funds rate should exceed 5%, but the market is beginning to worry that the Fed will tighten too much. The message from people close to the Fed is that the Fed hopes to prepare investors to slow down the pace of interest rate hikes in the weeks after the November 2 meeting, but not to cause a sustained rebound in the stock market.

The interest rate hike of 75 basis points in November is basically certain, and the possible outcome of the interest rate meeting:

1. Raise interest rates by 75 basis points, releasing hawkish infomation
2. Raise interest rates by 75 basis points, releasing neutral infomation (or no infomation)
3. Raise interest rates by 75 basis points, releasing dovish infomation
4. Raise interest rates by 50 basis points.

If it is (4) raising interest rates by 50 basis points, it is unexpected doves, and all indexes will rise sharply, and might rise by more than 3.5% that day.

If it is (3), the market will pay more attention to the interpretation of doves' information, because 75 basis points in November are known and priced by the market. Doves' messages include: raising interest rates by 50 basis points in December to slow down the rate increase, lowering the high point of raising interest rates, starting interest rate decline ahead of schedule (cutting interest rates next year), and including various "loose words" that need to continuously observe macro data before continuing to decide to raise interest rates.

If (2) does not give any guidance information, the market is more inclined to maintain the expectation of the Fed's latest statement. However, it is less likely that the market will rise and fall sharply, and the market will look forward to the decision of the FOMC meeting in December.

If (1) releases the hawkish message, the market will think that the Fed still focuses on "controlling inflation" and doesn't care much about the degree of possible recession.

The impact on the stock market (1) bearish; (2) little impact; (3) bullish; (4) Extremely bullish.

Powell is highly likely to give guidance to the market. This meeting is still very likely to bring about big market fluctuations.

The most suitable strategy for volatile market is Straddle.

For ordinary investors, it is most cost-effective to directly choose the options of index-related ETFs.

SPDR S&P 500 ETF Trust$(SPY)$ is the most active target of option trading, followed by Invesco QQQ Trust$(QQQ)$, and Dow related ETF again.

First, QQQ Straddle

Let's try November 18th straddle with exercise price of $275, Buying Put and Call at the same time with the cost $1,610. You should change your price according to the market price when placing the order.

Maximum loss is $1,610 till Nov 18. But we don't need to hold it for that long. If it fluctuates greatly and sells at the close on November 3rd, the break-even point should be around $270 and $280, which means that the fluctuation of about 1.8% can be balanced.

Second, QQQ Iron Condor 

If you plan to hold it for a longer time, you can choose an OTM Call and Put for protection

For example, buy at the same time Put and Call at an exercise price of $275, sell Call at $290 and Put at $260.

Similarly, you can choose to close positions as soon as possible after FOMC meeting to reduce time loss.

Happy Trading!