To The Moon

Next week brings the hardest-to-call FOMC meeting in a long while. The reason: the recent sharp rebound in oil, compounded by events such as a potential blockade of the Strait of Hormuz and restrictions on Red Sea shipping, has left the market with little confidence in how inflation expectations will evolve. If inflation persists, expectations for a Fed rate hike will heat up sharply — and could even become reality as early as the July meeting. Yet Trump remains firmly committed to rate cuts: a hike could trigger a sizable equity correction ahead of the midterm elections and, in turn, hurt his party at the polls. For this week's meeting, therefore, I lean toward the Fed standing pat — but with more hawkish language, nudging the market to give up its easing bets and get its “vaccination” in early.

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Facing a meeting like this, where are the trades?

Financial markets price expectations, and among all instruments, options are the most direct gauge of those expectations. When a looming event is seen as high-impact, traders tend to buy “insurance” to protect their holdings, bidding up option premiums — that is, implied volatility rises. So around any major meeting or event, options tend to get more expensive. A Fed meeting typically lifts the price of options on U.S. equity indices; once the meeting is over and the outcome does not greatly exceed expectations, implied volatility usually falls. That is why some institutional investors like to sell index options around the meeting, harvesting the drop in volatility.

This week's meeting is similar: a hike is possible but not a large deviation from expectations, and holding steady is the Fed's routine move. So investors can still consider selling puts on U.S. equity-index products — but keep the tenor short (ideally expiring within a week) and the strike far from the current index level (the Nasdaq's normal weekly range is about 6%, so it is best to sell strikes more than 10% away). That way, even if a genuinely bigger-than-expected surprise hits, implied volatility will not spike too quickly — which helps risk control.

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Will a hike weigh on gold? Yes — but only if a hike is actually confirmed.

Whether the Fed hikes is key to whether gold makes another run at its lows. As long as a hike is not delivered, there are not many real shocks to gold, and a base-building, range-bound path is more likely. But if the Fed holds and sounds dovish, that is bullish for gold and makes an accelerated rebound clearer. In any case, gold is currently in a bottoming range, and the view that it could accelerate higher at any time is unchanged — so wait for next week's decision. Strategy-wise, you can borrow the same sell-put approach used on equity indices; but investors must only sell puts on gold when their account can actually take delivery — it amounts to buying the dip by proxy. If the size exceeds what the account can bear, the strategy can distort and even turn into a risk-control loss, so never over-trade.

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