Ahead of Fed’s interest rate decision, here’s how derivative analysts are positioning the market

The US Federal Reserve is scheduled to release its monetary policy decision today. Amid sticky inflation, market analysts predict that the Fed will maintain the current ‘federal funds rate’ target range of 5.25 – 5.5 percent. However, since there has been no change in interest rates by the Federal Reserve since July 2023, many investors speculate that a rate reduction could be on the horizon.

Benchmark indices are trading choppy today. Here’s how traders in the derivatives segment are positioning themselves ahead of the Fed Meeting:

Akshay Bhagwat, Senior Vice president derivative research at JM financial noted that markets have lately been under selling pressure with mid- and small-caps taking the major brunt of selling pressure. “Nifty broke the 21,900 support yesterday, but ahead of FED policy tonight slight unwinding of short bets is leading to relief recovery in day trades.”

“Across options matrix Highest open interest (OI) in CE writing at 22,000 offers strong resistance. A cool off in VIX with PE writing addition at 21,700 hints a support base building up at 21,700 for the 21 March weekly expiry. Although relief recovery can see a day trading pullback prices should sustain above 21,975 for any bullish reversal scenario, ” added Bhagwat.

Expect Volatility in Markets; Consider Strangle Strategy

Rupak De, Senior Technical Analyst at LKP Securities, believes that the market is likely to remain volatile as the Fed is set to announce its policy decision and provide forward commentary.

The Nifty could open with a gap on either side tomorrow due to the current uncertainty in direction. Therefore, implementing a strangle strategy could be beneficial to capitalise on potential volatility resulting from positive or negative surprises from the Fed chairman.

Rupak De’s Derivative Strategy Recommendation:

Nifty Strangle Strategy: Buy 1 lot of 22,000CE @ 35.70 and Buy 1 Lot of 21,700PE @ 34.10, with a maximum loss of approximately Rs 3,500 and a targeted profit of Rs 5,000.

The Federal Open Market Committee (FOMC) meeting started on March 19 and will end on March 20. Fed Chair Powell will announce the final decision on Wednesday, March 20 at 2:00 PM ET.