Article / 19 September 2016 at 13:18 GMT

Volatility Update: Investors holding their breath before the Fed

Product Manager Futures and Options / Saxo Bank
Denmark
  • The options market suggests there'll be no surprise from the Fed
  • Forward curve indicates most investors are still long equities
  • Protection mostly sought via protective puts and covered calls
By Georgio Stoev

We are on the home stretch and just two days before the Fed's decision on interest rates. Judging by the options market, however, we are not likely to be surprised on this one. Before we dive in with both feet, let's take a dip into last week's market action.

chart
 Source: Saxo Bank

US equities showed wide daily ranges of more than 1% without any real follow up from the 3% drop on September 9. On Friday, a CPI announcement and quadruple "witching" options expiration, couldn't manage to move markets in the US.  

The week ahead

We expect markets to remain quiet prior to the Fed announcement and maybe in the foreseeable future. Judging by the options market, a rate hike is not likely on Wednesday or it's already priced in. The S&P 500 E-minis open interest report as of last Friday looks somewhat bullish for the index. 

Open interest




















Source: Quick Strike/CME Group

Traders seem to be positioning themselves around three key levels around the equity index: 2,100, 2,150 and 2,200. Using heavily out-the-money puts, the number of which increased by 12,245 contracts on Friday, market participants are looking at 2,100 in the S&P 500 as a key level. Although we cannot say for sure what their primary position was, the relatively high put-to-call ratio on open interest and volume could be considered as bullish by contrarians. Please click here more free information brought to you by QuickStrike. 

The forward curve, in which higher exercise prices are in more demand, is also suggestive that most investors are still long equities and are looking for protection primarily through protective puts and covered calls. 

e-minis vol structure
Source: QuikStrike/CME Group

It's a different story in oil

Open Interest Oil
Big interests could be see within a $10 wide range through which one could drive a tractor. Together with the parity in put-to-call ratio this could suggest that traders do not have a good sense of direction and therefore market doesn't have a clear view of direction here. 

Please make sure and sign up for this week's Weekly OptionsLab as Ole and I review oil, gold and other commodities and look for potential trading set ups. To reserve your place on Wednesday, please use the link below. 

Please make sure and sign up for this week's Weekly OptionsLab as we talk options on commodities. Ole Hansen, Saxo's head of commodity strategy, and I will review oil, gold and other commodities and look for potential trading setups. Click here to sign up.

Have a great week!

optionslab
 

– Edited by Clare MacCarthy

 

Georgio Stoev is futures and options product manager at Saxo Bank 


19 September
Market Predator Market Predator
@Georgio: Really good article from you again, surely practical example how to use this OI....tools (to measure sentiment).
I remember very good WOW series with Mr. Nick Howard where these tools were described. UNFORTUNATELY small window in recording! Next time, if there will be opportunity to repeat this: OI, term-structure etc. please ask Mr. Howard to speak little bit slowly, thanks.
My previous remark to this topic:
https://www.tradingfloor.com/posts/hello-mr-stoev-thanks-for-organising-webinar-wow29-with-mr-howard-usefull-tools-were-described-u-7608583
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