[Mou's Weekly] Earning less is a cost, losing more is an accident (Week 37 of 2026 | Issue No. 287)

Setting aside grand theories, let's look at a past event.

During the week of December 17, 2018, the Fed hiked rates on Wednesday and it was Quadruple Witching Day on Friday—a schedule identical to next week's. That hike was also fully priced in, with the market pricing in over a 70% probability before the meeting. Yet, the S&P 500 fell 7.05% for the week, and the Nasdaq dropped 8.36%, marking the worst week since 2011.

Three details are worth a closer look.

First, the hike itself came as no surprise. What triggered the selloff was Powell's comment at the press conference: 'Quantitative tightening is on autopilot and will not be changed.' The market had already digested the rate hike action; what it hadn't digested was his unwillingness to back down.

Second, that vote was 10-0. The committee wasn't divided at all, yet the market still fell 7%. Compare this to today: from 1957 to 2013, dissenting votes accounted for only 6% of all votes, with zero dissents in both 2000 and 2004. In December 2025, there were 3 dissenting votes against a cut. On July 29 this year, the vote was 9-3, with Hammack, Kashkari, and Logan calling for an immediate hike. Their direction was aligned—hawkish. This level of division is at a ten-year high. But 2018 taught us that even a unified committee can trigger a selloff, so a divided one is even more concerning. Don't try to guess how the market will react; you can't. Just prepare.

Third, the +4.96% bullish candle on December 26. Four months later, the S&P returned to its previous high. Those who cleared their positions on Christmas Eve missed the entire drop but gained nothing from the subsequent rally.

Placing Next Week's Position in the Context of the Week of December 2018

Here is the guidance I provided to my members: My account's leverage ratio has already dropped below 1.1. Next week, I will actively reduce it by another tier. All Sell Put positions will be closed. Long shares and Calls will remain untouched, and I will add Sell Calls across the board for hedging.

Let's run through this item by item，对照 the scenario of December 2018.

Leverage below 1.1: If the index drops 7%, a drawdown of around 10% for a high-beta account would be normal.

Closing all Sell Puts: This was the most fatal position during that week in 2018. VIX doubled within a week from its pre-meeting low. SP was caught in a vice, taking a hit from the price drop multiplied by Delta, and another from IV doubling. With IV currently low, closing SP positions is cheap. Buying insurance when premiums are low is better than waiting for the house to catch fire.

Leaving long shares and Calls untouched: You need to be present when the lightning strikes. I remain strongly bullish on the AI outlook; long-term positions should not change due to a single policy meeting.

Adding Sell Calls: It won't make much money, but it served one crucial purpose that week, as seen below.

The Original Intent of Sell Calls

Some will ask: With IV so low, the premium collected from selling Calls is thin. What's the point?

Not for the money. SC has never been an income tool in this account; it serves two purposes.

The first is to cap drawdowns. SC has a negative Delta, meaning it profits when long shares fall, effectively acting as an automatic partial position reduction. The sharper the drop, the smaller the Delta becomes, and the higher the hedge ratio. If long shares drop 10%, SC covers 2-3 points, reducing the account drawdown from 10% to 7%.

The second, and original intent, is psychological. A 7% drawdown vs. a 10% drawdown differs by 3 percentage points, but the human impact is non-linear. With a smaller drawdown, you have the courage to hold firm on December 26. With a larger drawdown, you would have cleared everything on December 24, leaving you staring blankly at the bullish candle on the 26th. SC isn't buying returns; it's buying the 'qualification to sit tight'.

What If We're Wrong?

Second question: What if the market surges after the rate hike?

Let's do the math. Missing a 5% gain requires only a 5% further rise to recover. Absorbing a 15% drawdown requires a 17.6% rise to break even, and leveraged accounts multiply this effect. Losses and recovery are inherently asymmetric, so the cost of hedging and the cost of accidents are also asymmetric.

Regarding operations: If Calls are exercised, we buy them back. Who can capture the entire upside? The foregone gains are a clear, bookable cost. The potential losses from an accident, however, are unpredictable.

After December 26, 2018, the S&P took four months to regain its previous high. Those who truly missed the rally weren't those who hedged that week, but those forced out by the drawdown.

At 2 AM Wednesday, Watch Three Things

Singapore time, Thursday 2 AM: The decision is announced. A 25-basis-point hike to 3.75%-4.00% is already largely priced in. The variables lie in three areas:

Dot plot implications for December. Deutsche Bank predicts one more hike in December, bringing rates to 4.00%-4.25%. In June's dot plot, 9 out of 18 supported a hike within the year. Watch where the median shifts this time.

Dissenting votes. There were 3 in July. If this time there are more than 3, or if dovish dissents appear, it signals the committee's division has shifted from 'to hike or not' to 'which direction'.

Warsh's characterization of inflation. May CPI was 4.2% YoY, with energy contributing over 60%. Blaming oil prices implies admitting a supply shock, which dilutes hawkishness; conversely, a harder stance is more hawkish. The hike itself matters less; the rationale behind it is key.

A Message

In the week of December 2018, everyone knew a rate hike was coming, but no one expected a 7% drop. Knowing and preparing are two different things.

Hedging is not bearishness; it buys you the right not to make decisions on the worst possible day.

[Next Week Outlook]

Next week is destined to be highly volatile.

Wednesday: US Fed decision during US trading hours. Thursday: Bank of England. Friday: Bank of Japan. Friday is also Quadruple Witching Day, with quarterly options, futures, and index options expiring simultaneously. Three central banks and one expiration date crammed into four days will amplify volatility, not diminish it.

Risk warnings are not bearish calls; pullbacks are opportunities to enter, provided you still have your ticket.

[For specific operations and portfolio details, please visit the website]

This article represents personal views and probability assessments and does not constitute investment advice. Data sources: S&P 500 and Nasdaq daily charts from Longbridge (closing price basis); Dec 2018 FOMC vote, Jun & Jul 2026 FOMC vote and dot plot from Fed announcements and CNBC/Yahoo Finance reports; historical dissent statistics from the Federal Reserve Bank of St. Louis; Figure 2 account curve is illustrative, assuming β=1.3, leverage 1.1, and SC hedging approx. 30% of drawdown.