Fed-CPI Double Blow; Options are pricing in 1.25% move in S&P 500 on Wednesday

Jun 10, 2024

Observations & Insight

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Lead Stories

Fed-CPI Double Blow; Options are pricing in 1.25% move in S&P 500 on Wednesday; Investors are focused on inflation as jobs market is strong
Jess Menton, Edward Bolingbroke, and Carly Wanna – Bloomberg
Whether it’s another move up or a dive down, traders are bracing for added volatility wrought by Wednesday’s dual macroeconomic catalysts: a report on consumer prices in the morning and the Federal Reserve’s rate decision in the afternoon.
The options market is betting the S&P 500 Index will move 1.25% in either direction that day, based on the cost of at-the-money puts and calls, said Stuart Kaiser, Citigroup Inc.’s head of US equity trading strategy. Should that pricing remain in place by Tuesday’s close, that figure would be the largest implied swing ahead of a Fed decision since March 2023, he added.

Beneath the Calm Market, Stocks Are Going Haywire; Only once in the past 25 years have individual stocks swung about so much while the overall market stayed placid
James Mackintosh – The Wall Street Journal
It is easy to look at the piddling daily moves in the S&P 500 and think the market has been oh-so-boring recently. There hasn’t been a 2% move since February and the VIX gauge of expected volatility is only up a bit from the postpandemic low reached last month. Under the calm surface, however, there is furious paddling. Only once in the past 25 years have stocks swung about like this while the overall market stayed so placid. Traders in the options markets are betting on its continuing: Prices indicate the biggest swings in stocks for at least 10 years relative to the prevailing calm for the S&P 500.

Retail traders push India stock option volumes above S&P 500; Small investors join trading rush as stock market hits record highs
George Steer in London and Chris Kay in Mumbai – Financial Times
Trading volumes of options on Indian equities have eclipsed those on Wall Street stocks, as retail investors pile into short-term bets on the country’s surging benchmark index. The notional value of options on India’s Nifty 50 index has grown to an average of about $1.64tn a day this year compared with average volumes on the S&P 500 index of $1.44tn, according to Bank of America data.

‘Let’s punish predatory short selling to the moon’: RFK Jr. invests $24K in GameStop, calls for ‘Ape retail rebellion’ and promises Wall Street reforms
Jing Pan – Moneywise
What do independent presidential candidate Robert F. Kennedy Jr. and Keith Gill, a.k.a. Roaring Kitty, have in common? A passion for GameStop (GME) stock. The latter was a pivotal figure in the meme stock frenzy in early 2021. Through his YouTube videos and social media posts, Gill advocated for the potential of GameStop’s undervalued shares, attracting a massive following of retail investors. This movement culminated in a dramatic short squeeze, where the stock price skyrocketed and short sellers betting against the stock were forced to buy it, sending it even higher. GameStop recently got back in the spotlight after Gill’s return to social media. And now, Kennedy is in the game, too.

Roaring Kitty is taking us to GameStop fantasyland: No short squeeze is coming
Cody Willard – MarketWatch
The suspension of disbelief that watching a movie requires reminds me of people who are buying meme stocks now. Suspension of disbelief means ignoring reality and logic. When you see someone on a social-media platform post a picture of a man playing videogames that causes a struggling videogame retailer’s – in this case GameStop GME – stock to go up 300% in the premarket, it feels like you’re watching a movie because you can hardly believe it’s happening in real life.

Great ‘Bear Market’ in Diversification Haunts Wall Street Pros; Mixed-asset model is trailing S&P 500 in 13 of last 15 years; Investor behavior is changing amid supremacy in US equities
Lu Wang – Bloomberg
They did everything right — spreading out bets far and wide across bonds and equities in case things went south. Now, after heeding Wall Street’s mantra to diversify for the long haul, these investors are watching with envy as the US stock rally leaves them in the dust yet again.
The numbers are stark. Money managers who obeyed the financial industry’s age-old wisdom to divide investments across markets and geographies are on an epic losing streak versus those who simply bought the S&P 500 and sat still. In one example, out of roughly 370 asset-allocation funds tracked by Morningstar Inc., just one has managed to beat the index since 2009.

Meme Stocks Are Back, but Fund Investors Moved On; Those wanting to track the meme-stock mania lost their chance when Roundhill’s MEME ETF closed last year
Jack Pitcher – The Wall Street Journal
Wild trading in meme stocks such as GameStop and AMC Entertainment has once again captured the imaginations of individual investors, but the frenzy of YOLO trading hasn’t lifted the fortunes of the fund industry.
Assets in U.S. thematic funds peaked at nearly $200 billion in 2021 and have since dropped to $120 billion, according to Morningstar Direct, even though major stock indexes are trading near records.


What to Know Heading into FTSE Russell’s 36th Annual Russell Reconstitution
Rick Rosenthal – Cboe
It’s that time of year! FTSE Russell’s 36th Annual Russell Reconstitution is underway. The well-honed process of updating the U.S. Russell benchmark indices takes place each year to reflect changes in the U.S. publicly traded equity markets.
According to the World Bank, the U.S. equity market consists of over 4,000 domestic companies with a total market capitalization of $53 trillion. To provide greater access to this market, FTSE Russell created the Russell 3000 Index, which measures the largest 3,000 companies or 96% of the investable U.S. equity market The Russell 1000 Index and Russell 2000 Index are subsets of the Russell 3000, tracking large-cap companies and small and mid-caps, respectively.

Regulation & Enforcement

SEC’s Power to Regulate Hedge Funds Dealt Blow by Appeals Court
Matthew Bultman – Bloomberg Law
The Securities and Exchange Commission’s loss in court over new restrictions on hedge funds and private equity firms casts a cloud over its other plans on artificial intelligence and climate change. The SEC based its authority for the private fund disclosure rules, vacated this week by the US Court of Appeals for the Fifth Circuit, on a section of the Dodd-Frank Act. Congress passed that legislation in the wake of the 2008 financial crisis to protect ordinary investors. The appeals court, which has a reputation for being business-friendly, said the SEC can’t rely on that section to dictate sales practices and compensation between private funds and institutional investors.

India proposes tighter rules for derivatives trading on individual stocks
Jayshree P Upadhyay – Reuters
India’s markets regulator has proposed tighter rules on trading in individual stock derivatives, arguing the rules were needed to avert risks of market manipulation after recent explosive growth particularly in options trading. The move comes after two sources familiar with the matter told Reuters in April that India’s top financial regulators would form a committee to assess stability risks emerging from a surge in derivatives markets.


OCC Welcomes Citadel Securities CTO Josh Woods to Board of Directors
Options Clearing Corporation
OCC, the world’s largest equity derivatives clearing organization, today announced the appointment of Josh Woods, Citadel Securities’ Chief Technology Officer, to its Board of Directors. Woods has nearly 20 years of experience in finance and technology. “Josh has a deep knowledge and understanding of financial technology, and we are pleased to welcome him as a Director and a member of our Technology Committee,” said Craig Donohue, OCC Chairman. “Our board and members will benefit from Josh’s expertise as we continue to foster innovation for market participants while promoting stability and integrity in our markets.”


Here’s what to do if you’ve missed out on the massive 54% stock market rally since October 2022
Matthew Fox – Markets Insider
It’s been almost a year since the Federal Reserve made its last interest rate hike on July 27, 2023, and with a record $7 trillion sitting in money market funds, it’s safe to say that a good chunk of investors have missed out on the stock market rally since then.
Fears of a recession and uncertainty surrounding the Fed’s fastest monetary tightening regime in history kept many investors fearful about the potential for a repeat of the 2022 bear market.

Individual stocks are increasingly going their own way. Here’s why a selloff might follow.
Joseph Adinolfi – MarketsWatch
The stock market’s “fear gauge” is broadcasting a rosy outlook for the S&P 500. But beneath the surface, individual member stocks are increasingly going their own way.
As a result, six-month implied correlation for S&P 500 SPX members fell to its lowest level on record last week, according to data from Cboe Global Markets — due to the fact that individual member stocks in the index are moving in lockstep much less frequently than they once did.

Cboe (Video)
Watch #Vol411 for updates from Joel Hawthorne @louiswinthrop on today’s most active equity and index options, as well as this week’s economic data (including the #FOMC rate decision & treasury budget) and earnings (including $ORCL & $ADBE).

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Crisis memory, geopolitics and the risks of financial contagion

Crisis memory, geopolitics and the risks of financial contagion

First Read Hits & Takes John Lothian & JLN Staff When Jack A. Wing died in 2011, I realized the industry was losing some of the pioneers of the financial futures era. Wing founded the masters program in financial engineering at the Illinois Institute of Technology,...

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The Spread

The Stock Market Has Rarely Been This Sleepy

Lead Stories The Stock Market Has Rarely Been This Sleepy Gunjan Banerji - The Wall Street Journal It's eerily calm out there in the stock market. The Cboe Volatility Index, or VIX, dropped below 12 last week, a nearly five-year low. The gauge, based on options prices...

Past Options Newsletters

The Stock Market Has Rarely Been This Sleepy

The Stock Market Has Rarely Been This Sleepy

Lead Stories The Stock Market Has Rarely Been This Sleepy Gunjan Banerji - The Wall Street Journal It's eerily calm out there in the stock market. The Cboe Volatility Index, or VIX, dropped below 12 last week, a nearly five-year low. The gauge, based on options prices...