Insights 
VT 
When the Federal Reserve meets, the question often asked is, “What will happen to the market?” This question arises due to the market’s tendency to react sharply after announcements. However, the more pertinent question is about the relevance of such market movements to one’s investment strategy.
For long-term investors holding quality stocks for five years or more, short-term volatility caused by the Federal Open Market Committee (FOMC) is irrelevant. These investors remain steadfast in their strategy despite short-term market changes. Conversely, short-term traders need to plan their response to potential market movements rather than predict them.
Risk Management Strategies
The focus should be on risk management and how to handle unexpected market changes. For example, even when holding a stock with a 100% gain, reducing the holding by 15% secures profits while retaining potential for future gains. Traders must consider their strategy, potential risks, and decisions that hold value regardless of market outcomes.
Significant market events, like FOMC meetings, trigger volatility but are not guaranteed profit opportunities. Successful market participants prepare for worst-case scenarios and protect their current positions before seeking new opportunities. The critical question is not what happens next, but rather why one is interested and how to act effectively.
Instead of trying to guess what will happen after the FOMC meeting tomorrow, the real question for us is how to position for the volatility. The market is not certain, with the CME FedWatch Tool currently showing a roughly 60% chance of a pause and a 40% chance of a hike. Our plan needs to account for either outcome, not just the one we expect.
Implied volatility is elevated, with the VIX hovering around 19, meaning options are expensive right now. We have seen this play out before, like during the aggressive hiking cycles of 2022 and 2023, where uncertainty builds right before an announcement. After the Fed speaks, this uncertainty premium often evaporates in what we call a “volatility crush,” which can hurt those who bought options at the peak price.
Post Meeting Strategy
This suggests that strategies designed to benefit from a drop in volatility, like selling iron condors or credit spreads on major indices, could be considered. For those who still want to make a directional bet, using debit spreads can define our risk. This way, a surprise move against us doesn’t wipe out our position, and a volatility crush has less of a negative impact.
Once the dust settles from tomorrow’s meeting, our focus must immediately shift to the next set of data. The recent August CPI report, which came in a bit hot at 3.6%, reminds us that the inflation fight isn’t over. The market’s reaction to upcoming employment and inflation data in the next few weeks will set the tone for the November FOMC cycle.
