U.S. stock options traders see little drama around Fed’s Jackson Hole event
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 expect a 1.4% move in the S&P 500 (.SPX) on Aug. 26, the day Fed Chairman Powell is set to give his speech, according to Matt Amberson, principal at options analytics firm ORATS. That is only slightly above the expected 1.0% daily move options are implying for stocks over the next month.
“The equity volatility market appears to be treating Jackson Hole as a non-event,” said Garrett DeSimone, head quant at OptionMetrics.
While there is still time for volatility expectations to pick up ahead of the event, for now, options pricing reflect “relatively low pricing for crash risk,” DeSimone said.
Market participants gave a range of reasons on why expectations for volatility may be muted. The market has had a heaping dose of Fed-speak in recent weeks, with policymakers pushing against expectations of peaking inflation and a dovish pivot from the Fed, giving investors a clearer picture of the central bank’s thinking.
And while markets broadly expect the Fed to raise rates by another 50 to 75 basis points when it meets again in September, Powell’s outlook on future policy will likely be colored by economic data reports that are due that month, including key numbers on inflation and employment.
“Everybody is kind of on the same page: we are in a tightening process, that process is likely going to gradually slow,” said Randy Frederick, vice president of trading and derivatives for the Schwab Center for Financial Research.
“For markets to be pricing in higher volatility, it usually means they are expecting surprises … I just think no one is expecting any earth-shattering revelations at that meeting,” Frederick said.
On average, Fed Chairs’ Jackson Hole speeches have not been big market movers in recent years. Only once in the last 10 years has the S&P 500 logged a greater than 1% move on the day the Jackson Hole symposium heard from the Fed chief.
Though stocks have been far more volatile than normal this year, market gyrations 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 demand for protection against drops in the stock market, is at around 20, compared to a high of nearly 40 reached earlier this year.
Still, some market watchers believe an even more hawkish-than-expected view from Powell could hit stocks.
Minutes from the Fed’s July meeting showed on Wednesday that policymakers were committed to raising rates as high as necessary to tame inflation. Several Fed speakers, including St. Louis Fed President James Bullard and San Francisco Fed President Mary Daly, have since stressed that policymakers need to keep raising borrowing costs to bring surging prices under control.
“I sense they are probably setting the stage for (Powell), and his speech is a little bit more on the hawkish side,” said Gregory Faranello, head of U.S. rates trading and strategy for AmeriVet Securities. “If it is … we could see a selloff in equities.”