Twenty-eight days from today, the FOMC will begin meeting to finalize their decision for a 2015 rate hike.
The December rate hike is rightfully heralded as the most important Fed event since the end of the QE in December 2014, the likes of which many trading today have never experienced.
Recent language in the press by members of the Federal Reserve has been mostly hawkish, but notes from recent meetings have been relatively dovish.
Fed Members continue to defer to Janet Yellen, who explicitly stated that a December Rate Hike was still on the table.
The announcement of what most believe would be a hike of 25 basis points would occur on Wednesday, December 16, so let’s turn to weekly options expiring two days later on Friday.
The SPY Dec Weekly 206 Straddle is priced at $8.03, implying the underlying will move this amount in either direction. In other words, the market is implying roughly an 80-point move in either direction by the close of trading on Friday, December 16.
VIX December weekly Options settle to cash with the opening print on Wednesday (the day of a possible rate hike), so we must turn to the January chain to see what volatility markets are projecting. CBOE’s VIX Futures are trading 17.65, and the VIX Jan 18 Straddle implies a move of $4.95, or a move of about 35.6% from current levels over the next 63-days.
While higher interest rates are generally perceived to be bad for the stock market, with rates at such low levels there is no guarantee what would be the first rate hike in over eight years will cause any market sell-off. In fact, a number of traders I know anticipate the announcement of a rate hike will propel us higher still.
I have been quite consistent since March – I do not believe there will be a rate hike in December.
Catalyst traders would be best served to play this event through the financial sector ETF XLF, as banks will be direct beneficiaries of the rate hike.
The XLF Dec 24 Straddle is $1.11, implying a move of nearly twenty-two percent over the next 31 days.
XLF is off by 2.1% year to date, having traded in a 52-week range of $18.52-$25.62, so the move implied by the options market is rather significant.
When trading catalyst events, I always like to use vertical spreads to reduce my premium outlay, and align my target strike price with the measured move target.
Rate hike or no, I believe the market will continue to rally into year-end.
