Reuters: Options Market Sceptical ahead of CPI

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(Reuters) Options Market Sceptical Ahead of CPI Data

The U.S. options market are not reflecting the same level of complacency as the stock market ahead of the U.S. inflation report, warned Michael Oyster, chief investment officer of Chicago-based Options Solutions.

The S&P 500 (.SPX) is about 4.5% away from its all-time closing high but the CBOE volatility index (.VIX), Wall Street’s fear gauge, is hovering at its long term average of 20 points.

This, Oyster noted, indicates that the “options market is exhibiting a healthier dose of scepticism than the stock market.”

“The CPI reading coming in above consensus estimates is a fear that the options market is currently pricing in, in that investors are still paying for put protections and that’s why you see the elevated pricing in the VIX,” Oyster said.

Consensus sees U.S. consumer prices increasing by 7.3% year on year last month after recording the strongest reading in nearly four decades in December.

The surge in inflation could force the Federal Reserve to tighten monetary policy more aggressively than previously feared.

Markets have fully priced in the possibility of a rate hike in March, according to CME’s FedWatch tool, with 77% betting on a 25 bps rise in borrowing rates and rest on a 50 bps hike.

“The stock market seems immune to any kind of bad news like the inflationary data or the reality that interest rates are going up… and you see that in the buy-the-dips mentality”, Oyster also said.

“The options market is saying there is an underlying risk that we are not fully appreciating at this point.. (so) puts are going to be expensive”, he concluded.

(Medha Singh)

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