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U.S. stock options traders see little drama around Fed’s Jackson Hole event

Federal Reserve policy triggered a big move in the markets this year, but option traders expect several fireworks around the annual central bank symposium this week in Jackson Hole, Wyoming.


Option positioning shows that traders are expecting 1.4% of traffic on the S&P 500 (.SPX) in August. 26, the day Fed chairman Powell is due to deliver his speech, according to Matt Amberson, director of the analytical firm ORATS, which deals with the analysis of options. This is just slightly above the 1.0% expected daily move options they are suggesting for next month’s stocks.


“The volatility market appears to be treating Jackson Hole as an event without an event,” said Garrett DeSimone, the chief quantum at OptionMetrics.


While there is still time for volatility expectations to rise ahead of the event, for now the option valuation reflects “a relatively low price for the risk of a crash,” DeSimone said.


Market participants have cited a number of reasons why volatility expectations might be subdued. The market has had a massive dose of Fed speech in recent weeks and policymakers have defied expectations of peak inflation and a dovish return from the Fed, which has given investors a clearer picture of the central bank’s mindset.


And while markets generally expect the Fed to raise rates another 50 to 75bps when it meets again in September, Powell’s outlook for future policy is likely to be colored by economic data reports due this month, including key data on inflation and employment.


“They’re all on the same page: we are tightening up, and the process is likely to slow down gradually,” said Randy Frederick, vice president of Trading and Derivatives at the Schwab Center for Financial Research.


“For markets that are expected to price in more volatility, that usually means they are expecting surprises … I just think no one is expecting any shocking revelations at this meeting,” said Frederick.


The speeches of Fed chairmen in Jackson Hole have not been big market movements in recent years. Only once in the last 10 years the S&P 500 saw an increase of more than 1% on the day of the Jackson Hole symposium, which he heard from the Fed chairman.


While stocks have been much more volatile than normal this year, the market turmoil has eased in recent months with a rebound that saw the S&P 500 gain 15% from mid-June lows.


The Cboe Volatility Index (.VIX), an option-based indicator that reflects the need to protect against stock market downturns, is around 20, up from a high of nearly 40 achieved earlier this year.


Still, some market watchers believe Powell’s even more hawkish-than-expected view could hit stocks.


The minutes of the Fed meeting in July showed on Wednesday that policymakers decided to raise rates as high as necessary to contain inflation. Several Fed speakers, including the Fed chairman of St. Louis James Bullard and San Francisco Fed Chairman Mary Daly have insisted since then that policymakers must continually raise borrowing costs to control rising prices.


“I sense they are probably preparing the ground for (Powell), and his speech is a bit more hawkish,” said Gregory Faranello, head of America’s interest rate trading and AmeriVet Securities strategy. “If that’s the case … we could see a stock sale.”


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


Source: Reuters Trust Principles.

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