At-a-Glance
Key Takeaways with Craig
US Equity Indexes traded lower for most of today, though a late afternoon rally led to a mixed close, as the market awaits the announcement of the FOMC Fed Funds target rate that is expected on Wednesday at the conclusion of its July meeting. US Treasury yields rose slightly and as did most major currencies against the US Dollar in CME’s futures markets, but the FOMC decision has the potential to move those markets as well.
Energy market price action remained active as WTI Crude Oil futures prices were up by about 2% while Natural Gas futures prices were up another 5.5%. Natural Gas is now up by about 60% since the beginning of July and implied volatility in the Nat Gas options is trading near recent highs at about 95% for options that have 30 days until expiry.
Given the much anticipated FOMC decision this week with market expectations of either a 75 or 100 basis point hike to the Fed Funds target rate (CME’s FedWatch tool is currently predicting a 75% chance of a 75 basis point move), we took a look at CME’s Event Volatility Calculator which seeks to isolate the impact of an economic release or event like an FOMC decision on the price of futures, using the term structure of volatility in the corresponding options market. This tool is attributing a 56 point move in the E-mini S&P 500 futures to the announcement of the FOMC decision.
In order to illustrate this concept, we graphed the term structure of volatility using QuikStrike below. The term structure reflects the idea that different options expirations tend to trade at different vol levels within a single product. The top two graphs depict the term structure in 10-Year Treasury options and E-mini Nasdaq-100 options. You can see how elevated the implied volatility is in the options that expire Wednesday compared to the more deferred expirations. However, the bottom picture, which is the term structure of the E-mini S&P 500 options really drives home the point. Because we have Tuesday expirations in the E-mini S&P 500 options, we were able to show the elevated level in the Wednesday options compared to the Tuesday options which will expire tomorrow and before the announcement.
As we’ve highlighted almost daily over the last several months here in the Key Takeaways section, CME offers Micro Treasury Yield futures that provide traders a very intuitive futures product with which to gain exposure to movements in the US Treasury Yield curve. Next Wednesday, August 3rd, David Gibbs will be presenting a webinar that will go into detail on these products and how one might use them. Please click here to register
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