Take Profits and Sell Your Calls – How To Option Trade the FOMC Statement

Posted 9:50 AM ET - Monday I outlined the pattern to watch for and it surfaced. The market tested major support and we saw a swift intraday reversal. That was a capitulation low and the play of the month was to buy when that pattern emerged. I have been painting that picture for weeks and it unfolded. Stocks continued to push higher yesterday and we will have a bullish opening today. TAKE PROFITS BEFORE THE FOMC STATEMENT. This is a binary event and it would be foolish to risk profits. I still believe the Fed will shower us with dovish remarks and that the market will grind higher into year-end. However, this is a low probability trading environment and I don't want to give my profits back. Yesterday I outlined 10 reasons the market would rally. I don't want to cover old ground so please go back and read that post if you want my analysis. I don't plan on being very active after the FOMC announcement. I will be trading from the long side this morning and I will close all of my day trades before the statement. I will also be exiting my call positions. There are a number of scenarios that can play out after the release. The most likely scenario is a gap up and a gradual grind higher. There will be lots of short covering ahead of option expiration. I will day trade if this unfolds, but I won't take any overnights. The upside from here is fairly limited and I don't want to be long overnight. The market could chop back and forth after the release and then find support. If we gradually grind above the 200-day moving average I will buy some calls and I will use that as my stop. I believe the SPY could reach $210. I don't want to buy into a massive rally and this scenario will give me a chance to get in at a good level. The market could tank on the news, but I see this as a low probability scenario. If we breach the 100-day moving average, I will by puts. If we trade below SPY $202 I will add. If we close below that $202 I will buy more put options. This would be a major breakdown and it would be a sign that the selling pressure is greater than seasonal strength. This would be a very bearish sign for 2016. I don't think the Fed will let that happen and the rhetoric will be very dovish, bordering on "one and done". Take profits before the statement. If we get a flat reaction and a gradual grind above the 200-day moving average, buy some calls. If we get a huge rally, stay sidelined. In the unlikely event that we tank, buy put options below the 100-day moving average and scale in using the guidelines I provided. Again, this is a low probability environment. The best play was to get long Monday and to take profits before the release. I hope you followed my advice. Take the 1 Week Free Trial and you can get the play-by-play in my Chat Room. . .

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