Trading FOMC Event Via Bearish Butterfly Spread
Arguably, the most important day of the year for the stock markets is right here. In about an hr, FOMC decision on interest rates will be announced. Almost everyone is expecting a 25bps rise!
Whatever the FOMC decision maybe, there is a speculative Option trade opportunity on either side. Though, I am bearish, the similar strategy can be used for bullish bias as well.
So in simple terms quickly, here is the trade-
Buy to Open a Broken Wing Put fly (What is a Butterfly Options Spread) for roughly $0.25 to $0.75 debit. Though it is slightly bigger range than I would ideally suggest, but for a bearish bias, it’s too good to pass. It consists of three options-
- Buy Dec 2020 Put
- Sell 2 Dec 200 Put and
- Buy Dec 1975 put
- All Dec Monthly Expiration i.e. Expires this Friday
Here is how risk/reward chart for the trade look like.
Here are the mechanics of the trade-
- Thus for 1 contracts it requires $2585 capital (Assuming $0.85 debit).
- Maximum risk is $585 (if S&P drops below 1980 by this Friday).
- I will lose only $85 if SPX remains above 2020 by this Friday.
- Maximum gains are about $1900+/- if S&P expires at 2000 this Friday (Don’t coun’t on it)
- IF however, SPX is anywhere between 1980 and 2020, this trade will bring solid gains.
Never ever violate money allocation principles. Allocate only what you can afford to lose 100%!!
WARNING: THERE IS A HIGH PROBABILITY THAT THIS TRADE WILL BE A COMPLETE WASHOUT (Don’t trade it after 1.45pm US Easter time i.e. 15 min before FOMC announcement).
Profitable Trading, OP
Disclaimer- This post is for entertainment only. Do your due diligence before investing any money or following this trade. Options are risk and you can lose all your capital in options.