With little news overnight, and generally quiet markets greeting us again this morning, I wanted to take a look at how SPX index volatility is priced ahead of the batch of events in the next 2 weeks.
Perhaps most interesting is how the term structure has remained steep between Sept and Oct even as the events approach. Sept 21st expiry implied volatility for the 1410 strike in SPX is around 13.5 vol, compared to 15.3 vol for the 1410 strike in October expiry, and 16.6 vol for the 1410 strike in November expiry. Historical volatility in the index has obviously been very low for the month of August, with yesterday registering another basically unchanged reading on the lowest volume of the year.
But with Sept expiry capturing the ECB meeting, German Constitutional Court decision about the ESM, and the FOMC decision about QE on Sept 13th, I expect the demand for September options to pick up in the next week. Clearly though, the options market views Bernanke’s Jackson Hole speech on Friday as a bit of a non-event, or we would already see more of a bid to September options. As a result, implied volatility in September is likely to move significantly higher next week after the Labor Day holiday and ahead of those events. In the meantime, traders don’t want to hold Sept options and pay the time decay.
Overnight price action:
- Asia was mixed, with Japan and Taiwan in the red, and China and Hong Kong in the green
- Europe opened in the red and has stayed there. SPX futures close to flat
- Treasury bonds holding yesterday’s gains, but the dollar slightly lower vs. the Euro, to 1.2545. Crude oil higher, and gold lower.
- Case-Shiller home price index release is at 9am, Consumer confidence and Richmond Fed Manufacturing at 10am