Traders are preparing for massive Fed-driven volatility

With the Federal Reserve set to release its next policy statement Thursday, one trader says the closely watched event could make for one of the most volatile trading days off of Fed news in several years.

Susquehanna's head of derivative strategy, Stacey Gilbert, said the prices of S&P 500 options suggests a 2.25 percent move in the S&P 500 on the day of the day of the announcement. Stocks have seen sharp swings in recent weeks of up to 3 percent a day, but Gilbert said this move would be noteworthy as a direct reaction to the Fed.

"Not surprisingly, the options market is suggesting that the FOMC meeting could be potentially one of the most volatile that we've seen in years," Gilbert said Friday on CNBC's "Power Lunch." "There is a lot of uncertainty out there, the market's obviously pricing it in as a notable event, and investors are definitely looking for some sort of protection."

Gilbert said she's seen investors buying more "crash protection," or options positions that would profit from a massive drop in stocks.

"We haven't seen this increase in crash protection over the last couple years," Gilbert said. "Portfolio managers and investors are looking at portfolios and thinking, 'What if?' 'I want to be able to sleep at night.'"

Market watchers have speculated on the possibility of a rate hike announcement, although most traders now see that as less likely, particularly given recent market volatility.

Read MoreConsumers may have just blocked a Sept rate hike

Andrew Burkly of Oppenheimer said the Fed could put off raising interest rates into 2016, based on inflation expectations and falling crude oil prices.

"To me the risk is essentially it's longer, not sooner," he said Friday on "Power Lunch."

However, Burkly is betting on one sector that could be primed to benefit once the central bank does raise rates.

Read More This sector is in desperate need of a rate hike

"Financials rates have been kind of sitting in a range right now. Even if they don't go next week, they are going to at some point relatively soon, and that should push up rates eventually, which would help the financial sector," he said.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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