What options to trade after fed rate cut?

Honestly, I’m not a big fan of the half point cut today by the Feds, but you really shouldn’t care what I think because I’m not an economist. That’s the job of the Feds. The reason I’m not so hot about the reduction is because I am a strong believer in market’s own correction, and not government intervention.

Anyway, that’s beyond the point. The point is, what option trades should I enter after today? Last week, I chose to enter into some put options on the S&P Index because the market has been moving in a zig-zag fashion in the last two months. Having seen some up days last week because of Wall Street’s euphoria with the Feds cutting interest rates, I wasn’t so optimistic and actually bet on the Fed not doing anything or only a quarter point cut.

Now that was a $2000 lesson learnt (as you can see, I avoid putting in more than 5% of my risk money). I admit that I should have stick to this one lesson from one of my options trading instructor 2 years ago - Never enter into one position on a trade. Meaning, I should not have bet on only one direction. However, I should still feel vindicated because back in the low of August, I had purchased some stocks and options that I have been watching for a while now to buy at a discount. Those have gain nicely for me. Anyway, that again is beside the point of this blog.

Looking forward, what is the best option trade to get into from the Fed’s action today. The best strategy is to take on a straddle position. What is a straddle position? As defined by Investopedia, “An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.” So this strategy allows me to play both direction with the expectation that in the next couple of weeks, the market will either move dramatically higher or lower.

Straddle is a good option trade if you believe the market or the particular stock will make a big move either up or down. You only lose money if it doesn’t move much at all. With the current volatility in the market, stagnation doesn’t appear very likely.

Next question, which options should I adopt a straddle position? I could either trade the S&P500, Dow, or Nasdaq. This time, I chose to trade the Nasdaq (ticker: QQQQ) because the Nasdaq 100 chart is in a vertical trend up and trending towards its 52 weeks high. It appears bullish but at the same time, is hitting resistance so may suddenly become bearish if it doesn’t break resistance. So to take my own lesson of never enter into a trade in one direction, I will adopt a straddle position on the QQQQ.

With the QQQQ at a market price of $50.04 as of closing today, I plan to enter the Nov 07 $50 Call at no more than $2.00 and the Nov 07 $50 Put at no more than $1.60. I expect to exit this trade within 2 weeks to both avoid time erosion but also taking advantage of the current momentum and euphoria because of the rate cut.

Patrick Lim aka Lazy Guy Trader

Up, up, and away! Author Resource:- Patrick Lim operates, a blog about his personal journey to take $50,000 to turn it into $1,000,000 in 5 years. He likes to share the strategies he uses to try to accomplish his goal and is now giving away a FREE article he wrote about how to make a quick profit during times of market volatility.

Join him on his journey and get FREE tips and strategies at:

No comments: