Will the Fed Cut, or Won’t It? This ETF Move Works Either Way.

The Federal Open Market Committee cut interest rates by a quarter-point at its Oct. 28-29 meeting. (Federal Reserve Board of Governors)

Mark your calendars for Dec. 10, 2 p.m. EST. That’s when the Federal Reserve’s interest-rate-setting committee will issue a statement that will tell the world whether members voted to lower rates or not.

The news will reverberate through global financial markets and help determine if America’s 2025 equity trading year ends with the resumption of a powerful rally or if souring sentiment solidifies into something problematic. Fed Chair Jerome Powell’s postmeeting press conference will also be closely watched.

Until recently, most investors expected a rate cut due to job market weakness. But some Fed members have recently expressed a reluctance to lower rates.

Their comments have rattled investors who are questioning the stock market’s extraordinary performance. Many benchmark indexes are still bobbing around record highs, and that has many investors concerned about high stock valuations. Still, the Fed’s governors must occasionally behave as if they are independent of the financial market’s desires.

Worrying about rate cuts seems histrionic, and arguably irrelevant, since corporate earnings are strong. But the market mob needs to fret about something when it isn’t speculating on event-driven trading off earnings reports or economic data. The current Fed obsession fulfills that need, as earnings season will soon end and many investors are debating if the artificial-intelligence trade is a bubble.

Though the long-term trend of the stock market is always higher, volatility defines the path. It’s important to identify moments that could cause stocks to move more vigorously than normal. Investors must then decide whether to trade the event.

Anyone who is concerned that Dec. 10 could be unusually volatile can pre-position for bullish or bearish fireworks with options on the small-cap iShares Russell 2000 exchange-traded fund (ticker: IWM). The ETF is a proxy for America’s economy, as its constituents primarily derive revenue from domestic sources. The S&P 500 index , by contrast, is dominated by large companies with international revenue.

With the iShares Russell 2000 at $233.47, consider “strangling” the ETF by buying the December $224 put option that expires on Dec. 12 and the December $245 call option that expires the same day. The strategy costs about $5.04 and it is profitable if IWM sharply reacts to the Fed’s rate news. With the ETF at $215, the put is worth $9. At $255, the call is worth $10.

The risk is that IWM trades in a tighter range than anticipated. If the ETF fails to move beyond the put and call strike prices, the trade is unprofitable. Only consider this strategy if you think the market might make a sharp move. The IWM call option is currently pricing an upside move of 1.5%, and the put option is currently pricing a downside move of 1.88%.

During the past 52 weeks, the ETF has ranged from $171.73 to $252.77.

The small-cap trade is our third consecutive fear trade. We have previously suggested that long-term investors take advantage of short-term market weakness by selling puts on blue-chip stocks that they want to own. That strategy is our preferred method for monetizing fear.

We have also focused on hedging the S&P 500 SPDR ETF (SPY) to insulate stock portfolios. The IWM trade is intended to put investors at the epicenter of a potential market paroxysm that coincides with a rarely discussed critical seasonal sentiment shift.

To wit, November tends to be a risk-averse month on Wall Street as employees start focusing on annual bonuses that represent the bulk of their annual compensation. Few sane people are willing to gamble a year’s worth of pay when there is little time left in the trading year to salvage a bad decision—and that will likely increase the tension around Dec. 10.

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