What are the probabilities that the Fed will raise interest rates?
We reviewed the CME's FedWatch tool and found the market is predicting a very slim probability of another rate hike tomorrow. Jerome Powell, Federal Reserve Chair, is still concerned about high inflation. What is interesting is that if you go further out in time, the probabilities become considerably higher of the Fed making a change to the overnight rate.
The decision will come out Wednesday (tomorrow) at 1pm CST.
Below we took a look at the moves of the market around the Fed meeting days and the action that the Fed took on those dates.
Takeaway -- the market has a tendency to make sizeable moves on these dates.
Nasdaq moves outside the expected
We examined the expected January movements in the Nasdaq, S&P 500, and Russell 2000, and followed up to see where the prices ended up. The Nasdaq has shown a strong rebound, notably exceeding the range calculated at the beginning of the year.
Alpha Boost Trade Ideas
3 trade ideas in IWM, SPY, and the Nasdaq.
We based these decisions on the historical moves above. A bullish move in the Russell, neutral in the S&P 500, and a bearish play in the Nasdaq.
IWM @ $181.9 IVR: 10%
Max profit is $219 Prob of success approximately 56% Requires capital of $281
Bullish
Long Call Spread
Sell -1 IWM 184.0 Call in Oct-20 (31 DTE) Buy 1 IWM 179.0 Call in Oct-20 (31 DTE)
Est. Buying Power Required: $281
Credit/Debit: $2.81 debit
Max Profit: $219.0
Max Loss: $280
Upside Breakeven: No upside risk
Downside Breakeven: 181.81
Max Profit Zone: $Above 184.0
Delta: 22, Theta: 0, Vega: -1
QQQ @ $368.2 IVR: 12%
Max profit is $134 Breakeven 3% above current price Prob of success approximately 66% Requires capital of $266
Bearish
Short Call Spread
Buy 1 QQQ 381.0 Call in Oct-20 (31 DTE) Sell -1 QQQ 377.0 Call in Oct-20 (31 DTE)
Est. Buying Power Required: $266
Credit/Debit: $1.34 credit
Max Profit: $134.5
Max Loss: $265.5
Upside Breakeven: 378.345
Downside Breakeven: No downside risk
Max Profit Zone: $Below 377.0
Delta: -8, Theta: 2, Vega: -4
SPY @ $441.56 IVR: 11%
Max profit of $210 possible Benefits from theta decay of $3.21 per day Breakevens are 3% to the downside, and 3% to the upside Requires capital of $290
Neutral
Iron Condor
Buy 1 SPY 427.0 Put in Oct-20 (31 DTE) Sell -1 SPY 432.0 Put in Oct-20 (31 DTE) Sell -1 SPY 452.0 Call in Oct-20 (31 DTE) Buy 1 SPY 457.0 Call in Oct-20 (31 DTE)
Est. Buying Power Required: $290
Credit/Debit: $2.10 credit
Max Profit: $209.0
Max Loss: $290
Upside Breakeven: 454.1
Downside Breakeven: 429.9
Max Profit Zone: $Between 432.0 and 452.0
Delta: -3, Theta: 3, Vega: -17
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