Key Takeaways with Craig
US Equity Markets opened higher but sold off rather quickly on the day before the expected FOMC announcement on its interest rate policy which is expected at 2:00 PM Eastern time tomorrow. The US Treasury Yield Curve action was interesting today as yields at the short end of the curve moved higher with the Micro 2-Year up by about 9.5 basis points and the Micro 5-Year up by almost 11.5 basis points while the Micro 10 and 30 Year Yields were down 2.5 and 7 basis points respectively. This move increased the amount by which the 2s and 10s are inverted to about 47 basis points.
As you might expect, the options markets are pricing in the potential for market moving news from the Fed tomorrow. CME’s Event Volatility Calculator suggests the option market is pricing in a nearly 190 point move in the E-mini Nasdaq-100 futures price attributable to the FOMC. We’ve included a few QuikStrike graphs below that clearly illustrate the premium on the options that expire after the Fed announcement. The top two graphs show the volatility curve in the E-mini Nasdaq-100 and 10-Year Treasury options and the elevated premium that is placed on the options that expire Wednesday after the expected announcement is quite obvious. However, the Euro FX options provide a nice lesson on how the option market prices in the risk inherent in economic events like an FOMC meeting. The Euro FX options that expire on Wednesday expire at 10:00 AM Eastern time which is before the expected announcement. As you can see, it’s the options that expire Friday, after the Fed announcement, that are trading at the elevated volatility/premium, rather than the Wednesday options.
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