Markets react most violently when something they expect to happen does not.
That’s exactly why I love Fed announcements.
While everyone else is trying to predict which direction the market will move, I’m positioning to profit no matter what happens. And my favorite weapon? The zero-day options strangle.
The Setup That Made This Trade Beautiful
Going into that September Fed meeting, the CME Fed Watch was giving a 94.7% chance of a quarter-point cut. Everyone expected Powell to deliver exactly what Wall Street wanted.
But here’s what most traders miss: when 95% of people expect the same outcome, you’re not trading the Fed decision anymore. You’re trading the gap between expectation and reality.
I kept thinking – what if Powell doesn’t give them what they want? After months of political pressure, wouldn’t that be the ultimate surprise?
My 1% Rule for Event Trades
Here’s my system: I target any move of 1% or more in the underlying. Doesn’t matter which direction.
For that Fed trade, I set up a strangle on SPY with calls and puts positioned around the 660 level. Total cost was about $6. If SPY moved up or down by 1% – roughly 6.60 points – I’d be profitable.
A 1% move in either direction puts me in profit. Anything beyond that is pure upside.
Why Strangles Work for Events
A strangle is simple: you buy a call and you buy a put.
The key is being in position before the event. You can’t wait until after Powell starts talking. You have to be positioned when uncertainty is highest.
If the market moves exactly as everyone expects, you break even or take a slight loss. But if anything unexpected happens, you profit big from the volatility spike.
When I Almost Got Burned
During one JOLTS report, I set up a perfect strangle and… nothing happened. The market barely moved. I lost most of my premium because the move wasn’t big enough to overcome what I paid for the options.
That taught me to be selective. Now I only use this strategy when I genuinely believe there’s potential for market surprise.
The Psychology Behind Market Surprises
The market always reacts most violently when consensus gets shattered.
If 94% of people expect a quarter-point cut and Powell delivers exactly that, you get a muted reaction. The move was already priced in. But if he does nothing? Or cuts a half-point? That’s when you see real volatility.
My Setup Process
About 30 minutes before the close on the day before a major event, I set up my strangle. I want to go into the announcement as neutral as possible.
I look for strikes roughly at-the-money or slightly out-of-the-money. The key is giving yourself enough time. I prefer options that expire at least one day after the event.
When to Take Profits
This is where most people screw up. They set up the perfect strangle, get the move they wanted, and then get greedy.
My rule: if one side hits 100% profit, I take it off immediately. I book the win and let the other side ride as a free play.
If both sides are profitable, I scale out. Take half at 50% profit, let the rest run.
YOUR ACTION PLAN
Speaking of Fed announcements, the next FOMC meeting is December 10th. Right now, the market is pricing in a 77.1% chance of a rate cut.
That’s not as extreme as the 94.7% we saw in September, but it’s still strong consensus. And whenever you have strong consensus around Fed decisions, you have the potential for surprise.
Most traders treat Fed announcements like a coin flip – they pick heads or tails and hope for the best.
I treat them like guaranteed volatility events where the only question is magnitude and direction.
Set up your strangle before the event, target that 1% move in either direction, and let the market’s surprise reaction do the work.
Because markets react most violently when something they expect to happen doesn’t happen. And when that surprise hits, you want to be positioned to profit from the chaos, not get crushed by it.