Introduction
Today I will share my trading plan for $Cboe Volatility Index(VIX)$ VIX options in light of the upcoming FOMC meeting. With the recent banking crisis, the Fed is expected to announce its interest rate decision, which will have a significant impact on the market. We will discuss the market's expectations, the possible outcomes of the FOMC meeting, and how we can trade VIX options to capitalize on the situation.
Background
The VIX (CBOE Volatility Index) is a measure of market volatility based on the S&P 500 Index's options prices. It is often referred to as the "fear gauge" as it tends to increase when the market experiences high levels of uncertainty or risk. In recent times, the VIX has been on the rise due to the banking crisis, with many investors fearing the potential impact of the crisis on the overall market.
In general, VIX values of greater than 30 are considered to signal heightened volatility from increased uncertainty, risk and investor fear. VIX values below 20 generally correspond to more stable, less stressful periods in the markets.
VIX K-line chart
Market Expectations
Most market participants are expecting the Fed to increase interest rates by 25 basis points. However, the Fed is also expected to calm the market amidst the banking crisis. Therefore, the market will be closely monitoring the FOMC meeting for any hints or guidance on the Fed's plans for the remainder of 2023 and beyond.
The decrease in investor fear after FOMC announcement?
When writing this post, I came across some articles which investigate the correlation between FOMC meeting and VIX. One of the more interesting article which is published in 2016 observed a significant decline in the VIX and VIX futures after the FOMC announcement. This is playing out recently as VIX spiked in the last 2 weeks with the banking crisis unfolding today and as we approach the Fed meeting, the VIX dropped to 21.38 yesterday.
If you are interested, the link to the pdf is https://acfr.aut.ac.nz/__data/assets/pdf_file/0009/29889/Adrian-FOMC-and-VIX-Futures.pdf
Trading Strategy
In my opinion, the storm is likely not over yet with respect to the banking crisis and I believe more volatility will return to the market. As a trader, I plan to purchase call option $VIXW 20230329 19.0 CALL$ if the VIX drops further after the FOMC meeting. However, I am aware that this strategy is riskier as I am betting on the market recovering, which may not be the case as $S&P 500(.SPX)$ and $NASDAQ(.IXIC)$ have both recovered significantly and have been on an uptrend for more than a week already.
On the other hand, if the VIX increases due to the Fed's interest rate decision or outlook, I will wait for the market to stabilize before making any trades.
Conclusion
In conclusion, the upcoming FOMC meeting is expected to have a significant impact on the market, especially in light of the banking crisis. As a trader, it is important to monitor the situation closely and make informed decisions based on the market's reactions to the Fed's interest rate decision. By trading VIX options, I can capitalize on the market's volatility and potentially profit from the situation. However this is a risky trade and I will keep my positions very small with money I can afford to lose.
Thank you for reading.
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