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What Options Are Saying About A Possible September Rate Hike

While 75% of 'expert economists' expect The Fed to raise rates in September, Goldman Sachs warns that if investors are worried about a September rate hike then it is not being priced via S&P 500 options...

September it is?

 

 

But what is the options market saying? Nothing to see here.

If investors are worried about a September rate hike then it is not being priced via S&P 500 options. Exhibit 1 shows the term structure of S&P 500 implied volatility. If investors were pricing event risk via S&P 500 options then we would expect to see a kink in the curve the week of the September 16-17 FOMC meeting. The typical tent-shaped pattern surrounding an event is not currently present. Instead of pricing additional risk at one point, S&P 500 options seem to be pricing additional risk throughout the entire curve post the September FOMC meeting (a parallel shift).

 

A few other highlights:

  • S&P 500 1m 50 delta implied volatility ended last week at 11.3. One-month twenty-five delta calls dropped to 9. S&P 500 ten-day realized volatility is 10.4; one-month is at 10.
  • Exhibit 1 plots the implied volatility for S&P 500 options from -10% OTM puts to +10% otm calls. The entire 1m implied vol curve is trading ~1.5 vol points below its 2015 average.
  • The S&P 500 1m straddle is pricing in a +/-2.6% market move over the next month. That corresponds to break-evens of 2146 and 2037.
  • S&P 500 1m 25-delta normalized skew is currently in-line with its 1y average.

What about the VIX market?

A big caveat when looking at the VIX futures or VIX options market. VIX options expire Wednesday September 16. Therefore they do not cover the FOMC press conference on September 17. S&P 500 options expiring Friday September 18th do. The VIX ended last week at 12.8. The VIX futures curve is showing no distinct event risk either. VIX 25-delta call implied volatility ended last week trading at 103.5, slightly below its 1y average of 106.

 

Source: Goldman Sachs