What Type of Movement Are SPX Options Pricing Into Jackson Hole
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Now on to the show:
There are heavy expectations ahead of Ben Bernanke's speech from Jackson Hole tomorrow. We can see this in the way option implied volatility has risen over the last few days. But just what type of move is the market expecting?
One of the nice things about the weekly options is that on a Friday event we can figure out exactly what the options market thinks the net movement will be after Ben Bernanke speaks. The August options that expire tomorrow in the SPX are trading:
This implies that market is expecting movement of about 27 points out of Mr. Bernanke's speech. If we consider that last year, with the market lower this speech moved the market 30 points, maybe 27 points isn't that much. My thoughts though are that this is extremely over priced, especially when compared to straddles in the regular contract months. Does it make sense to own a 27 straddle with 1 day left to expire or an 80 dollar straddle with 20 days left to expire like this one:
With all of the up and down garbage that has been going on in the market, I have little doubt in my ability to gamma scalp my way into a profit on the September straddle, a straddle that expires tomorrow might be quite a bit tougher to gamma scalp. The one thing I have to worry about is how VIX futures are lining up right now. There is a HUGE backwardation between VIX cash and September Futures:
That means there is generally an expectation that the VIX is going to fall at least 5 points by September expiration, my guess though would be that it falls closer to 10 points by Labor Day. There has been a big build up in volatility that I do not think is warranted ahead of this event. While last year, the discussion of QE2 seemed interesting and unknown, we have now seen what quantitative easing does in the long run...almost nothing.
Truth be told, a straddle is not the best way to play this, I would sell calendars into this news or I would sell condors. I think there is a lot of opportunity for those that are willing to step up and sell a bit of premium into this announcement. The meeting has been overdone to the nth degree. For the squeamish that want to play the long side of this without buying SPX straddle, JPM or C might be a great place to play Jackson Hole.
I would personally like to see Ben get up there and say, listen, this might be a small slow stretch, but I like what I am seeing and I do not think the economy needs easing. That would be a tough thing to do, but it would be the right thing and probably long term is better for inflation, the dollar and our debt.
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