Trading the FOMC Meeting: 0DTE & Next Day Strategies

Tomorrow, the Federal Open Market Committee (FOMC) will announce its interest rate decision, which seems more highly anticipated than past meetings this year because they’ve already signaled they will begin the next rate-cutting cycle. Still, it baffles me to no end that the entire market, and the world for that matter, still hangs on every word from a group of old men who think they can fine-tune global markets like a rare ‘69 Camaro. I don’t think it’s that easy, and we’ve all given them too much attention, but here we are with all eyes again on the Fed.

This got me thinking; given that we continually find ourselves in this “FOMC Week,” which seems like it will continue for many years to come, how could I trade the FOMC meeting this week? I think the default answer for many traders is to ignore or skip FOMC days/weeks because they fear volatility. Personally, I’ve just let my bots trade through them, pretending they don’t even exist, but I wanted to do something new this time and figure out a way to trade the event itself (if there was a way).

So, I pulled data on FOMC meetings going back to the beginning of 2022 and analyzed the SPX price movements heading into the FOMC meeting day, the meeting day itself, and the days following the meeting to see if there were any 0DTE or 1DTE “tradable” insights I could use to capitalize on the FOMC meeting vs. ignore it and miss a potential opportunity.

Here’s what I found…

Avg SPX % Price Move on FOMC Days

Not surprisingly, if we first look at the volatility of FOMC days we see that the average percentage move in the SPX on FOMC days vs. non-FOMC days was dramatically different. Of course, there’s not a huge number of data points on this given the FOMC meets about 8 times per year, so we have to take this with a small grain of salt, but the days they announce their interest rate decision are 60% more volatile. On average, the SPX moved 2% on FOMC days vs. 1.25% on non-FOMC days.

I lead with this broad analysis because I wanted to personally know if what I have experienced on FOMC days was warranted or just my imagination assuming that markets were more volatile. But my (and likely your) gut feelings were confirmed that FOMC days are much more volatile than non-FOMC days, which underscores what traders generally have “felt” about avoiding FOMC days.

SPX Price Range on FOMC Days

Next, for fun, I took the SPX price range on FOMC days and charted it as a candlestick chart, showing both the highs and lows throughout the trading sessions. What stands out to me is that we consistently see the market closing either on the highs or lows but not much in terms of “wicks” on these candlesticks, which signal huge intra-day reversals. Some days show strong upward momentum (green bars), while others reflect significant downward movement (red bars), and very few show monster turnarounds.

SPX % Price Changes on Up vs. Down FOMC Days

Now that I have a bit more confidence in the data that supports bigger volatility around the FOMC meeting, I wanted to know what the split was for up days vs. down days. I created these two pie charts to visually break down the percentage price moves on FOMC days for the SPX:

• Positive FOMC Days: This chart shows the distribution of days when the SPX finished higher. The slices represent the percentage of days that experienced moves less than 0.25%, between 0.25%-0.50%, between 0.50%-1.00%, or greater than 1.00%.
• Negative FOMC Days: Similarly, the second chart displays the distribution for days where the SPX finished lower. The percentage slices indicate how often the SPX dropped by the same various amounts on FOMC days as the first chart.

There’s a lot you could probably take from this analysis, but what stood out to me personally was that positive FOMC days moved more than 1% approximately 41.7% of the time, whereas negative FOMC days moved more than 1% approximately 66.7% of the time. I guess it’s only natural that down days see more volatility, but getting confirmation of this for FOMC days continues to help paint the picture for me.

Avg SPX % Price Move Before/After FOMC Days

Next, I analyzed the SPX movement before and after FOMC days. This was nothing more than an inquisitive question I had, wondering if the days leading up to or following the FOMC announcement stood out. I looked at one day before/after and five days before/after to see what the SPX did during these timeframes and I’m glad I went down this path because the results are very interesting.

Starting with the 5-day grouping, I was surprised to see that the five days after the FOMC were more volatile than the five days before, 1.4% vs. 1.3%, respectively. There was not a huge difference, and, on the surface, it didn’t seem that intuitive because I assumed that most traders would be trying to position themselves before the FOMC meeting, not after. But that wasn’t the case, and maybe traders are positioning themselves. Perhaps that position is more likely to occur after they know the FOMC decision.

Switching gears to the 1-day groupings, we see the same trend, which is just more defined and prominent. We still found that the day before the FOMC meeting was about as volatile as all other non-FOMC days, approximately 1.3% for both. However, the day after the FOMC meeting was significantly more volatile, with an average move of 1.6% in the SPX, which was almost 23% more volatile. Could there be something tradable here? Let’s continue with the analysis and start digging a little deeper.

SPX % Up vs. Down Days Before/After FOMC Days

Circling back to the pie chart concept, I analyzed the SPX percentage up vs. down for the day before and the day after the FOMC meeting. The pie charts below show the data, suggesting that the day before the FOMC meeting is a coin flip, where the market could be up or down with no discernible edge. However, the day after the FOMC meeting was down 66.7% of the time. If we believe that two-thirds of the time after the FOMC has its meeting, the market is down the next day, this is something that I can work with to craft a trade.

My Trades for the FOMC Meeting

As I mentioned at the beginning of this article, my goal in conducting this analysis was to determine whether there was a tradable opportunity around the FOMC meeting rather than ignoring it or skipping the event. As a recap of what we know now:

1. ‍FOMC days are volatile. We know that volatility for FOMC days is higher than normal, which means premiums will be elevated for options traders, particularly those for 0DTE contracts, early in the morning.‍
2. FOMC day close is a coin flip. This new research shows that the day of the FOMC meeting is a coin flip as to whether the market closes higher or lower. If it does close higher, it moves more than 1% only 41.7% of the time, which means it’s not as likely to move more than 1% if it does close higher.‍
3. The day after FOMC meetings is typically down. The market closed down 66.7% of the time the day after the FOMC meeting. This might present the biggest “edge” for a possible trading setup if we can lean on this data for next-day trades.

Here’s my plan of attack for trading options using this FOMC data:

0DTE Strategy

First, exploring a 0DTE strategy for the day of the FOMC event, my mind initially gravitates towards finding an SPX call credit spread around 1% from the market price using the 0DTE Oracle 15-30 mins before the FOMC announcement comes in the afternoon. If the market closes lower after the announcement, I win. If the market closes higher, I’m leaning on a slight edge that the market doesn't rally more than 1%. The only concern I would have entering a trade this late in the day would be that the premium might be dried up from time decay, as we’ve highlighted in our time decay research. Still, I believe the FOMC event will keep option premium elevated until just after the event, almost like a mini-mid-day volatility crush.

If you can’t be at your computer right before the announcement, this strategy is also easy to automate. You can create a bot to run a simple automation to open the trade automatically:

1DTE Strategy

In addition to the 0DTE strategy above, I plan to sell another SPX call credit spread for the day after the FOMC meeting. The historical data suggests that the market closes lower 66.7% of the time, so if I can sell a call credit spread OTM slightly for the next day, I should have a good edge built into this trade. The entry for this trade would be later in the day, near the close, to focus the strategy as much as possible on the day after the FOMC, given I’ll already be trading a 0DTE setup for the FOMC meeting day itself.

Again, this setup can be automated as well:

Conclusion

While some traders might shy away from FOMC events out of fear or uncertainty, I’ve always found comfort in the data and math of trading opportunities. So, rather than just blindly skip a market-moving event like the FOMC meeting, I can craft strategies that help me navigate the volatility and position trades that give me any edge I can find. For me, it’s about being proactive and strategic rather than reactive. After all, sometimes opportunities lie in the places where others are too afraid to look.