The Federal Reserve’s highly anticipated retreat to Jackson Hole, Wyoming, could create market volatility that options traders can take advantage of, according to Goldman Sachs. Derivatives research analyst Vishal Vivek said in a note to clients Tuesday that the options market is expecting a jolt from this week’s meeting. Fed Chairman Jerome Powell is scheduled to speak Friday, and investors will be trying to glean more information about the path of rate hikes from his remarks. “The options market is now pricing a kink in the S & P 500 term structure for the symposium, as well as around the next inflation report in mid-September,” Vivek said in the note. In some cases, such as the options markets for major bank ETFs, the potential moves appear largely price in, Goldman said. But that is not the case for two of the country’s biggest bank stocks: Bank of America and Morgan Stanley . “BAC options are pricing a +/-3.0% move, below the historical average straddle price of 4.2%. MS options are pricing a +/-2.8% move, a 28% discount to historical straddle prices,” Vivek said. A straddle is an options strategy where a trader buys a put and a call option with the same strike price and expiration date. The strategy is more expensive up front, but it does allow for the trade to potentially be a winner if stocks move in either direction. Bank stocks are generally sensitive to interest rates and benefit when those rates rise. However, worries about a potential recession have dampened investor enthusiasm about the group. Shares of Morgan Stanley are down about 10% year to date, while Bank of America has dropped more than 22%. Another area where options markets appear to pricing in abnormally low volatility is emerging markets ETFs, Goldman said. A straddle for the iShares MSCI Emerging Market ETF (EEM) is roughly 33% cheaper than its historical average, the firm said.
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