On Friday, Powell addressed the audience once more, this time delivering his remarks from Jackson Hole in Kansas City. During this event, Powell reaffirmed a couple of crucial points. Firstly, he restated his commitment to restoring inflation to the targeted 2%.
Secondly, he indicated the likelihood of maintaining higher rates for an extended duration. While there was some market response, it wasn't particularly remarkable. The accompanying chart illustrates the initial reaction within the option market, driving the price action to the Call Resistance Level—where most call activity occurs.
It's worth noting that the price surged well above the 0DTE High Vol Level. However, as Powell consistently reiterated his current approach throughout his speech, the market gradually reverted back to its initial level.
How Did The Market React To The Same Event Last Year?
But let’s use this event to see what option data we can look at before a similar event. As you would expect, the market positions itself before major events like Federal Reserve speeches and earnings releases. While navigating these events through trading is typically difficult, data can offer insights into market sentiment.
Then aligning with our broader macro view, we can make informed decisions about our positioning. Note that staying out before a major event is also a possibility not to ignore.
What Is The Data That We Analyze Before A Major Event?
The first thing you want to do is look at the positioning of the major indexes. For example, before the event the Option Matrix indicated a prevailing negative gamma in the SPX.
The figure of -159M signifies a negative gamma value. This observation suggests that the overall market holds a diminished long gamma position. Such a scenario tends to correlate with higher volatility expectations.
The Option Matrix also provides insight into the proportion of daily volumes attributed to options expiring within 24 hours (0DTE options). This aspect is growing in significance, as the volume of options expiring within a day is on the rise.
When these options experience considerable activity, they can instigate intraday volatility spikes. Meaning that the 0DTE levels that you can see in the first chart above can become very sticky levels.
Next we like to look at the 1D Exp. Move. This indicator is particularly valuable due to its ability to delineate a price range anticipated for the day. The range is constructed based on forward implied volatility.
It's worth noting that on days featuring significant events, intraday shifts in implied volatility can alter the 1D Expected Move. However, for the context of this analysis, our objective is to comprehend the market's pre-event positioning, as we seek to gauge market sentiment through option activity.
How To Use The Data On Other Indices And Assets
We can replicate this process for the QQQ QQQ as well as any other significant equity indices out there.
On the flip side, we know that the bond market is really the most important market, especially when it comes to major events like Federal Reserve communication.
With that in mind, analyzing the positioning of TLT (iShares 20+ Year Treasury Bond ETF) TLT can be very useful. That can give us an insight in where the option market sees rates going. A market positioned for a bullish TLT, is a market bearish yield and so forth.
The Significance Of Straddles
Straddles are a great way to gauge sentiment. These option spread strategies involve the purchase of both a call and a put option. This approach aids in calculating the anticipated movement of the underlying asset that the option is linked to.
Once again, using the Jackson Hole scenario as an example, we could compare the cost of straddle in 2022 and 2023. This comparison entails examining the straddles during the two annual Jackson Hole events.
The outcome of this analysis reveals that the volatility leading up to the event this year was notably lower than the previous year. This suggests that investors were comparatively less concerned about Powell's forthcoming remarks during that period.
We can then take a look at spreads. In this case, we could analyze Put spreads on the SPX and compare them to the previous year. Once again, we see lower volatility, and less demand on these protective spreads.
The option market has increased in volumes and will continue to do so in the future. Being able to assess positioning can help you gauge sentiment not only for day to day trading but also prior to major events.
Once again, that data may change during an event, but knowing how we are going into the event is also important and can help risk management.
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