Options Traders See Smooth Sailing as Fed Taper Looms

Options traders are showing little fear that U.S stocks will turn volatile in coming weeks, even as the Federal Reserve appears set to announce an unwind of the easy money policies that helped equities double from last year’s lows.

The Cboe Volatility Index, known as Wall Street’s fear gauge, recently stood at 15.52 after closing at a post-pandemic low of 15.01 on Thursday.

The S&P 500 Index was down 0.2% on Friday, a day after closing at a record high. Though many investors have worried over how stocks will react when the Fed begins to taper its $120 billion in monthly government bond purchases, the so-far sanguine trading in the options market suggests that market participants are not rushing to buy insurance against volatility over the next few weeks.

The Fed has suggested it will likely announce a taper at the conclusion of its next policy meeting on Nov 3.

“It definitively points towards investors being more comfortable with the Fed,” said Chris Murphy, equity derivative strategist at Susquehanna International Group.

“The Fed has done a really good job telegraphing all their moves, making everyone comfortable with what’s going to happen,” Murphy said.

That is not to say things couldn’t change as investors get more details on the Fed’s plans to withdraw monetary support and eventually raise rates.

The VIX briefly spiked to a four-day high of 16.39 on Friday after Fed Chairman Jerome Powell said that the U.S. central bank is “on track” to begin reducing its purchases of assets, and noted that he expects inflation to abate next year as pressures from COVID fade.

VIX futures expiring in coming months have been slower to pull back relative to the spot VIX, signaling a fair bit of anxiety about how stocks will perform in coming months, analysts said.

© 2021 Thomson/Reuters. All rights reserved.

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