Options traders brace for market volatility following release of US inflation figures

Traders in the U.S. equity options market are feeling apprehensive leading up to Tuesday’s unveiling of inflation data, which has the potential to influence the Federal Reserve’s monetary policy direction.

Options linked to the S&P 500-tracking SPDR S&P 500 Trust ETF (SPY.P) are indicating a potential 1% swing in the ETF’s shares in either direction by the close of trading on Tuesday.

This magnitude of movement surpasses the 0.7% fluctuation that traders had been anticipating for stocks ahead of the January inflation report, as per an analysis by Cantor Fitzgerald.

Options traders brace for market volatility following release of US inflation figures
Investors adjust rate cut expectations as the economy remains resilient, supported by strong earnings. (Credits: iStock)

The robust performance of consumer price and employment data, exceeding expectations, has gradually eroded investors’ anticipation for the extent to which the Fed might reduce interest rates this year.

Further indications of persistent inflation could prompt investors to scale back their expectations for Fed easing, possibly exerting downward pressure on a market rally that has witnessed the S&P 500 climbing by 7% so far this year.

In January, U.S. consumer prices saw a more substantial increase than anticipated, driven by a surge in rental housing costs. This development prompted a 1.4% decline in the benchmark stock index on February 13 when the data was made public.

Matthew Tym, head of equity derivatives trading at Cantor Fitzgerald, noted, “After last month’s stronger-than-expected report, ‘there is certainly more trepidation regarding tomorrow’s data and this will add to the nervousness of the options market today.'”

Investors have adjusted their expectations, now pricing in a 94 basis point reduction in interest rates for this year, compared to the roughly 150 basis points they had factored in at the start of January, as indicated by futures tied to the fed funds rate.

Nevertheless, the market has been buoyed by a resilient economy, earnings that have surpassed expectations, and a prevailing confidence that the Fed will enact multiple rate cuts before the year concludes.

Options traders brace for market volatility following release of US inflation figures
Forecasted CPI increase of 0.4% in February; core CPI expected to advance by 0.3%. (Credits: G Connect)

According to a Reuters survey of economists, the Consumer Price Index (CPI) is anticipated to have increased by 0.4% in February, with prices rising annually by 3.1%.

The core CPI, which excludes volatile food and energy prices, is forecasted to advance by 0.3%, with the year-on-year increase expected to slow to 3.7% from January’s 3.9%.

The S&P 500 index experienced a slight decline of 0.16% on Monday afternoon, while the Cboe Volatility Index (VIX), an options-derived measure reflecting investors’ expectations for short-term stock market volatility, rose by 0.46 points to reach 15.20, marking a nearly three-week high.

Sajda Parveen
Sajda Parveen
Sajda Praveen is a market expert. She has over 6 years of experience in the field and she shares her expertise with readers. You can reach out to her at [email protected]
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