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Tags: Federal Reserve | VIX | options | Yellen

Fed Bringing Stock Turbulence to Traders as VIX Climbs

Wednesday, 17 September 2014 09:40 AM EDT

As investors try to decode the Federal Reserve’s next step, options traders are betting that regardless of what happens, it’ll be a rocky ride for stocks.

Expectations for future price swings have jumped in the past month, with the Chicago Board Options Exchange Volatility Index rising 11 percent since Aug. 22 to 12.73. At the same time, the market has been so calm lately that a gauge of historical volatility is at 5.9, near a three-year low. The ratio between the two measures reached a 19-month high this week, according to data compiled by Bloomberg.

Economic stimulus from the central bank is set to end next month, leaving investors wondering how long interest rates will stay near zero as data from manufacturing to consumer confidence show signs of expansion. The Federal Open Market Committee will release a policy statement at 2 p.m. in Washington Wednesday, along with updated quarterly projections for growth, inflation, unemployment and the future path of interest rates. Fed Chair Janet Yellen is due to speak in a press conference afterward.

“The market is itchy and anxious about what the Fed will say,” Dan Deming, a managing director at Chicago-based Equity Armor Investments, said. “Traders and market participants are anticipating some movement here. The times the Fed has tried to rein in liquidity provisions and taken the IV out of the patient, it hasn’t gone too well.”

Policy Change

Fed policy is more likely to change at this meeting than past ones, economists at Jefferies Group LLC and Nomura Holdings Inc. wrote in recent reports. Officials will probably remove the “considerable time” language to make guidance more data dependent, according to a report from Jefferies this week. Nomura said in a note last month that the FOMC will probably make “substantial” changes to their forward guidance.

Yields on 10-year Treasuries have climbed to 2.59 percent, near a two-month high. Fed fund futures show the odds the central bank will increase its benchmark rate by July 2015 have risen to 55 percent from 51 percent at the end of August.

“People are starting to think the Fed is poised to start raising rates,” Robert Pavlik, who helps oversee $4.5 billion as chief market strategist at Banyan Partners LLC in New York, said by phone. “We might be in for a little bit of selling pressure, especially if they remove the language about keeping interest rates low for a considerable period of time.”

The VIX, a gauge of 30-day implied volatility derived from options on the Standard & Poor’s 500 Index, dropped 9.8 percent to 12.73 yesterday as the equity gauge rallied the most since Aug. 18. While it has risen in the past month, it’s still within three points from a record low.

Relative Calm

A measure of the S&P 500’s actual swings in the past 20 days has stayed relatively calm, reaching 5.06 on Sept. 5, the lowest level since 2010, data compiled by Bloomberg show. The VIX closed 2.6 times above the 20-day realized volatility Sept. 15, the highest since January 2013.

Weakness in the U.S. labor market and deteriorating conditions in Europe may persuade Fed officials to remain accommodative, according to Adam Perlaky, chief strategist at New York-based broker New Albion Partners LLC. He cited this month’s jobs report, which showed the smallest U.S. employment gain so far this year and declining workforce participation.

“I would be surprised to see any change in language,” Perlaky said. “The last few meetings have been ‘nothing to see here’ events.”

While the S&P 500 is less than 0.5 percent away from a record high, gains have stalled around the 2,000 mark. The U.S. equity benchmark is already up 8.2 percent this year. The two most-owned VIX contracts are calls expiring tomorrow with strike prices of 19 and 20, Bloomberg data show.

“We’ve seen the market lose steam,” Justin Golden, a New York-based partner at Lake Hill Capital Management LLC, said by phone. “Some investors might just be using this as an opportunity to hedge and that may be why we’re seeing the VIX wake up a little bit.”

© Copyright 2023 Bloomberg News. All rights reserved.

As investors try to decode the Federal Reserve's next step, options traders are betting that regardless of what happens, it'll be a rocky ride for stocks.
Federal Reserve, VIX, options, Yellen
Wednesday, 17 September 2014 09:40 AM
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