Tomorrow afternoon, Wed. October 31, the Fed’s Open Market Committee will meet and decide whether to again trim the FedFunds rate, which it cut 0.50% at the last meeting to 4.75%. The market is expecting a cut of 25 to 50 basis points, and if there is no cut, I expect a bit of volatility tomorrow afternoon. The market thinks the possibility of a recession is real, despite half-hearted assurances from on high, and a rate cut is needed to convince the market that the Fed is taking things seriously.

But I think the market will not be mollified by patter about inflation or anything else; it wants a cut. An article in the WSJ noted that the FOMC will either take no action or cut another 25 points. I expect a 25-point cut, because they can always cut again, but cannot keep changing it up and down, like Mexico. I don’t think the FOMC will ignore market concerns, but also does not want to signal undue concern about the economy, which a 50-point cut might do.

Be advised that the market could sell off if no cut is announced, and might sell off on anything less than 50 basis points. Some think the market sold off today (Dow down 77 points to 13,792) on anticipation of no cut or a small cut tomorrow, and if this is true, a 25-point cut may not provoke a sell-off.

Implications for covered call writers:

Anyone putting on a covered call position tomorrow should be prepared for more volatility and possibly another sell-off. If the market sells off tomorrow afternoon, consider buying a NOV or DEC put on long stock positions in order to take an extra profit from market volatility, closing the put on the pullback. Be watching the market tomorrow afternoon if you do this, since it sometimes gives head-fakes of a sell-off and then recovers. You can always sell the put.

This entry was posted on Tuesday, October 30th, 2007 at 5:09 pm and is filed under Covered Calls, Markets/Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.