What Options Market Pricing Signals For S&P 500 Ahead Of Inflation Data, Fed Decision

Pricing in the U.S. options market on Monday indicated investors and traders were positioned for the S&P 500 index to swing as much as 2.5% in either direction in the wake of Tuesday’s consumer price inflation report, reported Reuters, citing data from options market-making firm Optiver.

Tom Borgen-Davis, head of equity research at Optiver said, “With the October CPI reading having spurred such an outsized positive reaction, the market is implying what could be an even bigger move to the downside if inflation comes in meaningfully higher than expectations,” according to the report.

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Major Wall Street indices closed over 1% higher on Monday after last week’s subdued performance. Markets are expected to witness a significant bout of volatility in the next two days when inflation data release and the Federal Reserve meeting are expected to happen. The S&P 500 closed 1.43% higher on Monday.

The SPDR S&P 500 ETF Trust SPY closed 1.44% higher on Monday while the Vanguard Total Bond Market Index Fund ETF BND closed flat.

Options prices are estimating a 1.8% swing in either direction for the S&P 500 index immediately following Wednesday's FOMC decision, the report said, citing Optiver data. Friday is also the last monthly options expiration for the year, where traders intending to replace a large number of expiring contracts can cause a surge in trading volumes.

Expert Take: Brent Kochuba, founder of options analytic service SpotGamma, stated for now, options positioning is "very balanced between calls and puts," giving little indication of which way traders anticipate the markets to swing, according to the report.

"The direction of that move is Fed dependent," Kochuba said.

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