Wednesday, January 30, 2008

Fed Fun

Just a quick note before the Fed's interest rate decision in 15 minutes and then I'm back to my regularly scheduled blogging. If you want to have some fun and have access to a computer screen with a real-time data feed for the S&P Emini futures, do yourself a favor and watch the screen closely around interest rate announcement time. Having actively traded this index in the past before completely burning out (it's not for the faint of heart), I've watched the ticker during many interest rate announcements--talk about a rollercoaster ride!

Based on previous observations, if the Fed doesn't do what the market wants (in this case cut by 50 bp), you'll see the price plunge drastically within a few seconds. It'll stablize for another few seconds before beginning a steeper plunge that could last up to 30 minutes. This usual over-reaction will cause the price to slowly climb back up. However, if the Fed doesn't cut at all which is highly unlikely, then I don't see the price hitting any sort of bottom, at least not anytime soon.

The other scenario is that the Fed will do what the market wants (cut by 50bp). Watch the price shoot up for about 10-20 seconds before plunging back down to below the pre-announcement price. Sometimes the price can oscillate wildly around the pre-announcement levels before settling on a direction, and many times that direction is not necessarily up.

In my futures trading days, I ALWAYS made sure I was out of the futures market during Fed announcements. I can withstand the gnarliest rides at Magic Mountain, but my stomach was no match for this carnival nightmare.

If you have a small amount of risk capital, one way to play the Fed decisions is to take an ATM (at-the-money) straddle position in the Q's or the Spiders. Woo-hoo!

Posted by Dr. Kris at 11am PST

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