This Wednesday, the Federal Reserve is likely to announce its first interest rate cut in years, a move that could send shockwaves through the market. This pivotal FOMC meeting coincides with the key September option expiration (op-ex), also known as a Triple Witching event. The combination of these two events is likely to have a major impact on market direction and investment flows in the coming months.
While the FOMC is expected to cut rates by 25-50 basis points, a key question remains: What are the best trades to capitalize on this anticipated market movement? Given the likely positive impact of lower rates on small-cap companies, I’m focusing my attention on the iShares Russell 2000 ETF ($IWM).
$IWM has been trading within a range between 200 and 225 since May 6th, with repeated attempts to break through the crucial 225 resistance level in July and August. This resistance zone is significant because it represents the Top Call Strike (TCS), where the highest concentration of call options exists. This heavy concentration of call gamma makes it harder for the price to break above 225.
However, the anticipated rate cut could provide the catalyst for a breakout above this resistance level. Small-cap companies, which tend to have weaker financials, often rely on borrowing to fuel their growth. Lower interest rates reduce their financial obligations, giving them more financial flexibility to invest and expand. A 25-50bps rate cut could significantly benefit these companies, ultimately boosting the $IWM index.
While the 220-225 range represents the TCS, I’m seeing strong positioning for $IWM up to 230 by the September op-ex. The September options market is exhibiting significant call volume at the 230 strike price (12,000+ contracts), and there’s also notable call activity at that level for the October expiration (3,900 contracts).
Assuming the market reacts positively to the FOMC announcement, $IWM has the potential for a strong rally, potentially clearing the 225 resistance and targeting the 230 level. To capitalize on this opportunity, I’m looking for both short-term (September op-ex) and medium-term (October op-ex) strategies to split my positions.
The short-term trade will focus on high-gamma strategies, leveraging the increased volatility around the September op-ex. For the medium-term October op-ex trade, I’ll focus on lower-cost options with the potential for higher profits. I’m leaning towards buying call spreads for both expiries to take advantage of this anticipated market movement.
To stay informed and learn more about my specific trading strategies for the FOMC/September op-ex week, I invite you to check out the Trading Waves signal service. Here, I share my live trades and analysis with members in real time. Members receive access to my live trades, along with my insights into market positioning, flows, and price action (PFP). This valuable information allows them to make informed trading decisions and stay ahead of the market.
