Analysis: US stock option traders see little drama around Fed’s Jackson Hole event

A trader watches Federal Reserve Chairman Jerome Powell deliver a speech on the floor of the New York Stock Exchange (NYSE) in New York, U.S., June 15, 2022. REUTERS/Brendan McDermid/File Photo

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NEW YORK, Aug 22 (Reuters) – Federal Reserve policy has sparked big moves in markets this year, but options traders expect few fireworks around the central bank’s annual symposium this week in Jackson Hole, Wyoming.

Options positioning shows traders expecting a 1.4% move in the S&P 500 (.SPX) on Aug. 26, the day Fed Chair Powell is due to deliver his speech, according to Matt Amberson, director of the options analysis company ORATS. This is only slightly above the 1.0% daily move options expected for stocks over the next month.

“The equity volatility market appears to be treating Jackson Hole as a non-event,” said Garrett DeSimone, head of quantity at OptionMetrics.

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While there’s still time for volatility expectations to pick up ahead of the event, for now, option prices reflect “relatively low prices for crash risk,” DeSimone said.

Market participants gave a range of reasons why volatility expectations might be subdued. The market has had a massive dose of Fed rhetoric in recent weeks, with policymakers opposing expectations of a spike in inflation and a dovish pivot from the Fed, giving investors a clearer picture of the central bank thinking. Read more

And while markets generally expect the Fed to hike rates another 50-75 basis points at its next meeting in September, Powell’s outlook on future policy will likely be colored by reports on the data. economic data to be released that month, including key inflation and employment figures. .

“Everyone is kind of on the same page: we’re in a tightening process, that process is likely to gradually slow down,” said Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research.

“For markets to price in higher volatility, that usually means they’re expecting surprises…I just think nobody’s expecting earth-shattering revelations at this meeting,” Frederick said.

On average, Jackson Hole speeches from Fed chairs have not been big market movers in recent years. Only once in the past 10 years has the S&P 500 recorded a move of more than 1% on the day the Jackson Hole symposium heard from the Fed chief.

Although stocks have been much more volatile than normal this year, market swings have eased in recent months alongside a rebound that has seen the S&P 500 gain 15% from its mid-June lows.

The Cboe Volatility Index (.VIX), an options-based indicator that reflects the stock market’s demand for downside protection, is trading around 20, down from a high of nearly 40 hit earlier this year.

Still, some market watchers think an even more hawkish view than expected from Powell could hit stocks.

Minutes from the Fed’s July meeting showed policymakers on Wednesday were determined to raise rates as high as needed to keep inflation under control. Several Fed speakers, including St. Louis Fed President James Bullard and San Francisco Fed President Mary Daly, have since stressed that policymakers must continue to raise borrowing costs to control the rise in prices. Read more

“I feel like they’re probably setting the stage for (Powell), and his rhetoric is a bit more hawkish,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. “If so…we could see a stock sell-off.”

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Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Daniel Wallis

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