FOMC Aftermath and Financial Firm Trades - 9/18/25 | In The Money

CHASE COTNOIR: Welcome back to another episode of In The Money

here at Fidelity, where we break down trading strategies

and share actionable ideas for you, the trader at home.

My name is Chase Cotnoir, a brokerage content editor

here at Fidelity Investments.

And joining me today, as always on this program, is Tony Zhang.

Tony is the chief strategist and co-founder of OptionsPlay,

and has spent the better part of 16 years helping

to coach and educate clients on a variety of trading strategies

topics, including risk management and options.

Tony, as always, it's great to have you back

on the show in this program.

Like our audience, preparing for today,

I'm always curious as to what's on your mind.

What are you looking at in the marketplace?

And so I would love to talk about

the macroeconomic backdrop, what's changed, if anything,

with the Federal Reserve announcement yesterday and some

of that really big news that came out,

and what are some specific options,

opportunities that we can share with our traders.

I'd love to hear your thoughts, Tony.

And thanks for being with us again today.

TONY ZHANG: Yeah.

Thank you so much for having me, Chase.

As you said, if we look at things from a macro picture

perspective, the major news event

that we have to pay attention and digest

is the FOMC meeting yesterday.

The Fed delivered the expected 25 basis point rate

cut as markets were expecting.

However, the question was whether we're

going to get the pace.

Or rather the question was just what

is going to be the pace of interest rate cuts

into the rest of 2025 and going into 2026?

And if you look at the dot plot of

The projections from the FOMC meeting,

right now they're penciling two more rate cuts for 2025.

That is what the bond market was expecting.

There were some projections that were

looking at potentially seeing a 50 basis point cut in September.

But I think that is off the table here for now.

However, I think what did surprise the markets

a little bit was the Fed is only expecting one more rate

cut in 2026.

That was actually a little bit more hawkish than

what the market was expecting.

Chairman Powell did highlight the fact

that the job market is, quote unquote, no longer very

solid as the reason why they've chosen to cut rates.

And that is largely why the market was expecting the rate

cut here in September was the job numbers

that have come out over the last couple of months

have been increasingly weak, especially

the revisions that we've seen.

And the Fed right now is walking a pretty tight tightrope here

right now, because the question is whether or not

are they cutting rates fast enough to support the slowing

growth of the job market while at the same time trying

to manage the tariff-driven inflation risk that could still

peak in the second half of 2025.

Now looking at how markets reacted to the news yesterday,

equities largely responded broadly positively.

We saw financials lead on the rate cut optimism, especially

interest rate sensitive sectors saw a little bit of a bump here.

Technology actually lagged behind.

And I think that was more so because of the fact

that technology trades at such high valuations at the moment.

There's still some concerns around that.

on top of the fact that technology,

just as of from a concentration perspective,

is making up a fairly significant percentage

of, let's say, the S&P 500.

And that's always a concern here for equity investors

when there's so much crowding in such a few names that

is influencing the markets.

If you look at the S&P 500, we're up nearly 35%

from those April lows.

And there have been some signs of exhaustion pretty much

since July.

If you look at the chart here of the S&P 500,

we've been essentially making higher highs

since even as going as far back as May whereas the momentum has

no longer made higher highs if you look at MACD.

And there's just some of these signs of exhaustion that,

if they were to unwind themselves,

the major level of support here really goes down to around

the 6,000 level on S&P. So that's a pretty significant

pullback here, nearly 10% that we could potentially see

in the markets to unwind as a result of the rally that

we've seen here since the April lows that have gone unchecked

since then.

So I think the biggest change here

is still going to be from the bond market's perspective,

because the bond market reacted very strongly

over the last few weeks.

We saw, at the long end of the curve,

react quite positively to the weakening job numbers where

we've seen the 30-year yield get down to around 4.6%.

The 10-year yield got down to around--

I'm sorry.

The 10-year yield got down to around 4.0% and the 30-year got

down to around 4.6%,

Showing a pretty significant sign

of easing over the last few weeks.

But the bond market actually saw yields rise after the FOMC

meeting yesterday.

And again, that really reflects the fact

that the bond market was actually

looking a little bit more dovish than the Fed delivered

yesterday.

And that, I think, is still going

to be the biggest concern here for equity investors going

forward.

But overall, the rally here in equities

still look fairly constructive into year end,

barring the risks that I currently

see with regards to just the level of exhaustion

that we've seen here in the overall markets

because the participation in this rally here,

it's improving but it's not improving, in my opinion,

strongly enough in order to support the rally that we're

currently in.

The VIX back below 15% I think is relatively constructive.

And it points to a base case where

we're still in the status quo bullish bias of the markets.

And the market tone remains cautiously bullish

even though it is a little bit more fragile here

near these highs.

Overall, I do think equity investors still

remain fairly optimistic that the Fed can thread the needle

and lower rates at a rate that will support the slowing job

numbers that kind of still produce

this kind of soft landing base case

the market is hoping right now.

So equity investors, I think, for the most part

are still expecting that we can see

a gain into the rest of the year given

the fact that if the Fed can maintain this pace of two more

rate cuts in the last two FOMC meetings

into the end of the year.

CHASE COTNOIR: Got it.

OK, Tony.

And I guess, I'm definitely hearing a comment about some

of that concentration within the S&P 500,

specifically when we think about information technology or some

of those technology names.

I guess a question that I would have

that maybe a lot of other option traders

are probably thinking about as well is, is there

any kind of equity sector that we expect would benefit

or, conversely, others that would be meaningfully damaged

by some of these rate cut decisions that are being had

because I know there's a lot of sector-focused option traders

that are out there these days.

Is there anything that's obvious to you,

or is it really more about the bonds

at this point, kind of seeing how that situation develops

moving forward?

TONY ZHANG: Yeah.

So if you look at, historically speaking,

when we embark on a rate cut cycle,

there are a few sectors that I think

are worth paying attention to, both from a statistical

perspective but also from a fundamental perspective.

First of all, if you look at the reaction from the sectors

yesterday, financials responded quite positively, nearly

up 1% on the news yesterday.

And this is largely because the major banks at the moment

have a fair amount of commercial real estate

exposure on their books.

That is a very interest rate sensitive sector.

And as lower interest rates--

as we have lower interest rates, that

is going to ease some of the concerns

around commercial real estate.

Also, just lower rates will, generally speaking,

stimulate loan growth, which is going

to be positive for the banks.

And that's why we've seen such a strong reaction from financials.

You have XLF essentially making all-time highs.

You have a lot of the major banks making new all-time highs,

outperforming the financial XLF ETF.

So financials, overall, I think is

the most obvious play here in a lower interest rate environment.

But then there's a couple of other sectors

that I think are also worth paying attention to.

You have health care.

Health care is trading at around 17 times forward earnings, which

is a pretty significant discount to the S&P's around 22 times.

And it's the worst performing sector in the markets right now.

But from a valuation perspective,

it's looking quite constructive.

And generally speaking, in an interest rate cutting

environment, defensive sectors like health care

tend to outperform, by an average of around 20%.

So health care is definitely one sector

that I think is worth paying attention to,

especially specific names that are trading

at compelling valuations.

Some of the health insurance companies, I think,

look quite attractive.

You also have some of the pharmaceuticals that

are looking quite attractive here

from both a fundamental and a timing perspective.

And then lastly, utilities.

Utilities, as a sector overall, tends

to do quite well in an interest rate cutting environment.

But we also have more secular tailwinds

for the utility sector, which is largely on the front of AI.

AI is actually using up a fair amount

of energy, the energy capacity that we have here in the US.

So utilities have this kind of double

tailwind with regards to the macro environment with the lower

interest rate and then the secular tailwind from the AI

industry that is expected to grow a fairly significant amount

here in the next call it three to five years in terms

of the need for energy and utilities is benefiting

from that.

So those are three sectors that I think worth paying attention

to in this macro environment of lower interest rates

that I think are quite compelling.

CHASE COTNOIR: Noted.

Awesome.

Thanks, Tony.

And I think now that we've covered

some of the macroeconomic backdrop,

I think if you're an options trader out there,

you're probably thinking, all right, let's

get a little bit more tactical.

Tony, you mentioned financials, XLF a couple of different times.

And so that's probably a perfect segue into today's trade idea.

What are you looking at, Tony?

What's the setup?

Kind give us the context here for what we're looking at.

TONY ZHANG: Yeah.

I want to take a look at Citigroup, the bank,

because, like I said, financials is

the sector that tends to do quite well in this type

of market environment.

And Citigroup has a really compelling turnaround story

that I think is starting to take shape here.

A lot of the cost controls and efficiency

goals that the management team has

been trying to put in place in the last few years

is starting to take hold here.

And I think investors are starting to pay attention,

especially as they improve their guidance

that they're putting out here for the next couple of years.

If you look at a chart here for Citigroup,

they recently just broke out here above a $100 resistance

level, which is a 52-week high.

It's doing so on not only strong volume,

but it's also outperforming both the sector

and the overall market.

If you look at in comparison to the XLF ETF, as you can see,

as we break out to new 52-week highs,

the relative chart to the XLF is also breaking out to new 52-week

highs.

And what that means is that it's outperforming its sector.

That means that there's potentially

some institutional accumulation of this stock

as it breaks out to those new all-time highs.

And if you look at the business here,

Citigroup trades below book value.

There's almost none of the major banks that

are anywhere close to that.

JP Morgan, Morgan Stanley, these are

all stocks that are trading at more than 2 times

their book value.

Yet Citigroup trades at a significant discount.

Now you could argue that it trades at that discount

because it's not as profitable as those other stocks.

But it is catching up in terms of both profitability

and its ability to return on tangible equity to investors.

So EPS growth right now outperforms its peers.

It's continuing to improve their profitability.

Earnings and revenue growth continue to expand here.

And they've recently just returned $3.1 billion

to shareholders in the form of buybacks.

Raised their dividend.

They have one of the highest dividend yields of one

of the major banks.

So the focus on efficiency, focus on returning cash

to shareholders, clearly that's starting to show up here

in the charts as we see on the breakout to new recent highs.

This is all looking quite constructive.

And then just the valuations look quite compelling

and suggest that there's significant upside that remains

here in Citigroup even though we just broke out to new 52-week

highs.

So the trade structure that I want to use here for Citigroup

is using a debit spread.

And the reason I'm using a debit spread is because we're trading

at these new 52-week highs.

Whenever we're buying something at 52-week highs,

we're effectively buying high and hoping that it's going to go

even higher.

And there's always some risk with that.

So I want to reduce the amount that I

risk when I trade these types of setups

by using a call debit spread.

And I'm going out to the October expiration.

I'm looking at buying the 100 by 110 call spread.

So I'm buying the 100 calls and selling

the 110 calls against that.

I'm paying a roughly $4.85 for the $100 call option.

And I'm collecting a little over $1 to sell the 110 call.

That brings my net debit on this trade down to $3.80.

So on a roughly $100 stock, I'm risking right now just

under 4% of the stock's value if this does not

go in the direction that I expect it to,

which is $380 worth of risk per contract.

And if Citigroup does continue to move higher,

if let's say, by that October expiration,

the stock is above that $110 level,

my maximum gain is $620 per contract.

So I'm getting a little over than 1 and 1/2 to 1 risk reward

ratio while risking less than 4% of the stock's value.

If Citigroup were to pull back, if it

were to decline materially, no matter how far it declines,

I'm only risking just under that 4% of that stock's value

using a trade structure like this.

CHASE COTNOIR: Yeah.

And Tony, when I look at this trade structure,

it's obviously a very clearly bullish trade setup here

for the name.

But I know you're also trying to balance risk.

You're recognizing that it's had a pretty significant bullish

uptrend up to this point.

And it's like, well, how long is that going to last?

I have to balance risk versus opportunity with the setup.

Just a thought that kind of came across my mind

as well when I look at this is that, in our

Personal lives, professionally, we always

say something like, hey, comparison is the thief of joy.

We don't want to compare ourselves to other people.

We don't know what's going on in their lives.

But when it comes to investment opportunities,

we absolutely do want to, as prudent traders,

do our very best to make that comparison.

So I love that you're calling out

XLF versus Citigroup versus maybe the S&P 500

and looking across the board to see the relative comparison

and the relative performance.

Just a quick note here and we'll transition

to some of our look backs, which is, before today's session--

and again, folks, these numbers could

have changed up until today.

But previously, XLF, that sector ETF for financials,

was about 30% higher from the April tariff lows--

I'm using that as a main reference point--

where, comparatively, the S&P 500 is up about 40%,

so a little bit greater performance.

And Citigroup over the same time frame is up 85ish percent

as of now, so clearly, to your point, Tony,

showing some of that outperformance relative

to the broader market, relative to a commonly used financial

sector ETF.

So again that comparison, it can add value to a trading process

when we apply it in an appropriate manner,

whether it's fundamental or, in this case, technical.

All right.

Let's shift gears a little bit and talk

about some past trades, Tony.

We've talked about current events.

We've talked about some future trade opportunities.

Let's look back to a recent trade here.

Talk to me about this setup.

Are we happy with the performance?

What would we do moving forward here in today's look back?

TONY ZHANG: Yeah.

I think a little over a month ago

was when we put out this trade.

I put out a bullish thesis on Morgan Stanley

And really for the same reasons that I'm

bullish on Citigroup because of just the macro environment

that's generally beneficial for financials.

And at the time, Morgan Stanley was trading around 157 and 1/2

or so.

And we bought the September 145/155 call spread.

Very similar trade structure to what

we're doing here in Citigroup.

And that stock has rallied pretty significantly from that

147 and 1/2 at that time, roughly to around 100 and-- just

shy of $160 as of earlier this morning.

So when we bought that call spread for $4.70 a little over

a month ago, that call spread is now trading at $9.75,

just shy of the $10 maximum gain or maximum that this call spread

can trade at with only just one day left to go on this trade.

So this is really where I think it makes sense to take profits

on this particular trade.

If you were to do that, that would

net a profit of around $505 per contract,

a little over 100% gain on this underlying position.

However, as I've laid out here from

both in the macro perspective and from Citigroup,

I think that there's further upside potential here

for a lot of these financial institutions such as Morgan

Stanley, especially ones that generate

a significant percentage of their revenue

from wealth management.

As equities get-- as equities reach record highs,

asset prices gets inflated.

That's going to generate higher fees for wealth management

firms like Morgan Stanley.

So that's where I think there's further upside here for stocks

like Morgan Stanley.

So I think that for some investors,

it can make sense to also consider

rolling this particular trade.

And I'm looking at going basically

extending the trade further out to the October expiration

and basically recentering the strike

prices based on the current price of the stock.

So I'm going out to October.

And I'm looking at buying the $155 call options

and then selling the $165 call options against that.

Earlier today, you can buy that for about $5.10.

So if you take the roughly $5.05 that you made in profits from

the first trade to effectively pay for the debit spread going

out to October of $5.10.

Your net result of the new trade that we're putting on

has a maximum risk of only $5 with a maximum reward of $995.

So you effectively have a call spread to potentially profit up

to nearly $1,000 per contract without taking on any additional

risk if you were able to successfully roll the September

trade into the October trade.

And this is a prime example of how

you can take a trade that has worked out in your favor

and potentially take the profits from it

and roll it into a new trade, and take what is effectively

a nice win from the first trade and potentially

try to hit a home run with the second trade with it.

And this way, you're not taking on any additional risk

because you've effectively rolled all the profits

from the first trade into the second trade

using a trade structure like this.

CHASE COTNOIR: Tony, what stands out

to me as you were going through that, that look back,

was a nice win.

I think as traders, we need to do a better job of appreciating

those when they do come around and also making sure

that we're managing the risk opportunity,

even if it's a nice win responsibly.

One of the key takeaways for me in that trade setup that you

just highlighted is that let's not

fall in love with those last few dollars.

Oh, well, hypothetically, Tony, if I just

held a little bit longer, I could eke out

a couple extra bucks.

Yeah.

Or, in this case, as you're indicating here,

hypothetically could just close it, be done with it,

have that nice win.

The trade already worked in your favor.

Let's move on to the next thing.

I just want to simplify for the folks at home here.

I know went through a lot of detail in that last trade.

If you're confused at all about that whole situation,

as many newer option traders tend to be,

just for a foundational approach,

a roll is really closing a previously existing trade

and then simultaneously opening up a new one.

So it really is still two different trades.

You're just kind of conveniently doing it all at one time.

It's just a trade management practice.

If it's easier for you at home, just hey,

I'm just going to close this trade.

Just end it and then go and place my separate new trade.

That's totally fine as well.

The strategy is pretty much the same here.

We're just indicating that the role feature is simultaneously

closing the old and opening the new.

So I hope that makes sense for any of our newer option traders

who are kind of looking at that for the first time

and trying to make sense of it.

Tony, as always, thank you about making sense of it.

You've helped me, and I think our viewers today,

make sense of the market developments, what we're

seeing macro economically and also technically, fundamentally,

and some very interesting trade setups out there

in the marketplace.

But that's going to wrap it up for today's session and today's

episode.

I want to thank you, Tony, for coming back.

As always, we definitely appreciate it.

And don't forget, folks, to stay tuned.

There is going to be a follow-up session, as always,

with our Trading Strategy Desk.

That's going to be tomorrow, Friday at 1:30 PM Eastern

Standard Time.

You can sign up for that session by going

to fidelity.com/inthemoneyfollowup

And if you're looking for in-the-money follow up

and if you're looking for further insights that maybe you

missed from today's live show, you just couldn't make it,

you can always sign up for the Active Investor Weekly

newsletter, receive highlights, get some trade updates.

discussed from today's session by visiting fidelity.com/act

iveinvestorweekly.

I'm looking forward to next week's episode,

but until then, we wish everyone the very best.

We'll see you next time.

Thanks, everybody.

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