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Ready for Rate Cut and Market Reactions?

Published on September 18, 2007

Ready for Rate Cut and Market Reactions?

September 18, 2007

(for details pls visit www.OptionPundit.net)

FOMC announcement is due soon, and here are my thoughts. I suggest doing your own due diligence to find out what makes more sense to you.

If there is cut, following sectors may do well. You may chose to either play via best-of-breed company in each sector or via ETF for that sector.

  • Materials (XLB, IYM)
  • Industrials (XLI, IYJ, VIS)
  • Technology (XLK, IXN, VGT)
  • Financials (XLF, VFH)
  • Consumers (XLY, IYC)

This is September Option expiration week and a) there are only 3.5 days left for expiration, so very little time value left, b) IV has risen and as I was expecting it has even risen further as of now. As soon as announcement is out, IV will plummet (unless announcement is a surprise to downside). My bias is to play via option, probably via credit spread so that I can take advantage of high IVs (good premium) and greater decay (High Theta).

dow-pre-fed-sept-18-2007.pngHere is the bad and good scenario for DOW ($INDU):

  • If it goes up, 13,575 then 13,700
  • If it goes down, 13,225->13,000 then 12,850 (Aug 16th low), if panic prevails then watch out for 12,500

For S&P 500, something similar:

  • If it goes up, 1,500 then 1,515-20
  • If it goes down, 1,460–>1,440 then 1,410 (Aug 16th)

To reinforce, above levels are just guiding points, one needs to be very careful, especially in a selling market. Whatever it does, prepare your moves accordingly,

Profitable trading, OP

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