US stock prices declined slightly (though E-mini Nasdaq-100 and Russell 2000 were down relatively more than the Dow Jones and S&P 500) today after yesterday’s sharp rally. Even though implied volatility in the Equity Index options markets at CME Group ticked up today, it remains well below the levels we saw at the end of last week. Longer term US Treasury futures prices were slightly higher (lower yields) after a bigger drop in yield on Friday, though yields still remain elevated relative to December and January levels. It was a relatively quiet day on CME Group’s price board, though Copper futures prices rose again, back toward recent high levels.
With the recent focus on the long end of the Treasury yield curve and corresponding potential increase in inflation expectations, we thought it would be timely to look at CME Group’s “Event Volatility Calculator” which seeks to isolate the impact that an economic event or number release could have on the price of the futures using the term structure of volatility of the option market. This Friday, the Department of Labor will release its February Employment report which, sometimes, has market moving potential so we wanted to see if the options market was pricing in a move in the Equity Index futures attributed to the jobs number release. As you can see in the top image, based on the term structure of volatility, the options market is pricing in a 173 point move in either direction, in the price of the E-mini Nasdaq-100 futures as a result of the numbers release.
The lower image is a QuikStrike graph of the term structure of volatility in the E-mini Nasdaq-100 options market. The term structure refers to the fact that options with different expiries tend to trade at different implied volatility levels. As you can see in the graph, the option expiring this Friday (after the release of the employment report) is trading a higher level of volatility than the options that expire sequentially after it. As we said earlier, the Event Volatility Calculator uses these differences to try to estimate the impact that the jobs number release could have on the price of the futures. And remember, the impact is specific to the magnitude, not the direction, of the futures price move.