How To Trade Tomorrow's Fed Rate Cut

This Wednesday we have one of the most watched FOMC events with the Fed likely to start their first interest rate cut in several years. This is also ahead of the key September option expiration (op-ex) which is also a Triple Witching event. The combination of these two events likely will have some of the largest forward impacts in terms of direction and flows for months to come.

But with the FOMC potentially cutting rates 25-50bps, the question remains:

What would be the best trade to take?

Assuming we get a 25 or 50bps rate cut, I think one of the tickers that will see a lot of flows and impact will be small caps, thus I'm heavily watching $IWM.

$IWM has been stuck between 200 and 225 since May 6 of this year with more than five attempts between July and August this year to break above the key 220-225 resistance zone.

Positionally, this resistance zone makes sense since it's the TCS (top call strike) whereby the highest concentration of call gamma is positioned. This means it becomes harder to break above this zone since call gamma is heavily reduced above 225.

I think there is the potential for a break and close above the 225 resistance zone after this week due to the FOMC event. By cutting rates, small cap companies tend to benefit since they have weaker financials and are most likely borrowing money to build their companies. With interest rates coming down, this reduces their financial obligations, thus increasing the available liquidity they have to finance their company growth. Thus a 25-50bps rate cut could heavily benefit small caps and thus the $IWM index.

While the 220-225 is the TCS, I'm seeing positioning out to 230 out to the September op-ex. Volume wise 230 is attracting a fair amount of calls (12+K) for September and 3.9K for October.

Assuming the market has a bullish reaction to the FOMC, I suspect $IWM can make a good run, perhaps finally clearing the 225 resistance zone, which would put 230 on deck.

To trade this idea, I'm looking for something both short term (September op-ex) and also medium term (October op-ex) to split my positions. The short term would be a high gamma trade while the October op-ex trade would benefit from a cheaper cost and thus higher profit potential.

I'm leaning towards buying call spreads for both expiries to take advantage of this opportunity.

If you'd like to learn how I'm specifically trading this and other tickers for the FOMC/September op-ex week, make sure to check out the Trading Waves signal service where I make live trades and share them with my members in real time. Members get access to my live trades, along with my analysis of the PFP (positioning, flows and price action) in the market which I share several days a

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