Cheddar News' Courtney Sturgeon reports from the Cboe floor with Russell Rhoads, Associate Clinical Professor at Kelley School of Business to break down why option traders should pay close attention to the FOMC meeting on Wednesday and monthly payrolls being released on Friday.

Cheddar News' Courtney Sturgeon reports from the Cboe with Russell Rhoads, Associate Clinical Professor at Kelley School of Business to break down why option traders should pay close attention to the FOMC meeting on Wednesday and monthly payrolls being released on Friday.

How Options Traders Can Prepare for Volatility

This next segment is brought to you by CBO, the world's leading Derivatives and Securities Exchange Network. Our reporter Courtney Courtney Sturgeon is standing by in Chicago with Russell Rhodes, associate clinical professor at Kelly School of Business. Take it away, Courtney. Good morning. Yes, it's a busy week here at, we have some earnings and also announcements coming out. That's where we're going to start with Russell here. Russell tell us a little bit about the fed announcement coming out tomorrow and what options traders will be looking for? Sure, we'll get the F C tomorrow. There's pretty much consensus that we're going to see a 25 basis point hike checking the derivative markets a few minutes ago is about a 90% chance that's going to happen. And then the futures markets are pricing in. That's it. We're done as far as rate hikes go. These guys are going to be paying more attention to what comes out of the statement as opposed to the actual headline number since that's the one where there might be some uncertainty and might be some changes farther out in expectations. And one of the things that these guys behind us in the S and P love is volatility and we get nothing more than extra volatility or extra anticipated volatility. When we've got a big announcement like the F C tomorrow afternoon and will the jobs report have any type of scenario like that they'll be looking for? Absolutely. It's a great week to be hoping for volatility as we've got the April non farm payrolls number coming this Friday. That number has been much more of a wild card for the markets. Going back to the beginning of 2020. The current market environment with COVID and everything, but the options don't necessarily reflect much more volatility lately in the non farm payroll number, they have been anticipating a lot of volatility around the OMC number which is tomorrow and one day option traders who have been selling options before the last seven F C numbers have actually profited quite well as they expected a lot more than the market's reaction. Can you expand a little bit about those economic numbers? Why one day options are all of a sudden, you know, something that people are looking at those numbers for. Absolutely. The option industry had the big conference last week, got to talk about record volume again in 2022. And a big contributor to that is daily options that expire on the S and P 500 SPX daily can be as much as half of the trading volume just in the options. Going to expire in the next day or two. But also one of the reasons these options are so popular is they really give you a way to make a specific wager on what the reaction is going to be. To some of these major economic numbers. We get like the F C and the non farm payroll number. So I went back and looked at how the option market or what is the option market anticipating as far as the volatility around these figures and they have been over price tremendously in the SPX pit going back. I believe the last seven FC announcements now they've been pricing in about a 1.71 point 8% move right now. What's kind of interesting is just checking the market. It looks like they're only pricing in about a 1% move. So that consistent overpricing might be getting into the market where they may underprice the one, the reaction that we get tomorrow. Very interesting as the, how should traders position themselves for what's coming? Sure. Well, if you, if you're speculating on a bullish or a bearish outlook relative to the number, what you think the reaction is going to be, it's very simple to either buy a call or buy a put based on your outlook. But professional traders are more interested in volatility, what's being priced in volatility wise and what the subsequent realized volatility is and what I'm kind of looking at as we get this afternoon and we looked at the option pricing close to the close. I'm looking, if the SPX options at the money straddle is pricing in 1.5% or higher, which would be much higher than the average move over the last few reports. I'd be looking at selling options, but early this morning, they seem to be under price pricing in less than a 1% move. So if that holds up and we don't see an adjustment by the end of the day, I actually think buying options might be the turn up to the up tomorrow. Interesting. Now, before we get to the straddle that you mentioned, I did want to throw you a bit of a curveball here because it is a new product. But the one day that came out last week is that while traders figure out, you know how that can best be utilized. Is that something that could be in this scenario? Well, the one day, one day options have been out just under a year now and it's pretty interesting. The option market always does a very good job over a long period of time of anticipating the subsequent realized volatility. But as these daily options became very, very popular over about two or three quarters of 2022 they were actually mispricing the next day's move frequently that I am going to just right now before we go to break. But we're definitely going to want to know more about that. Thank you Russell for being with us and we'll come back with more. Thanks to our reporter Courtney Sturgeon with Russell Rhodes, associate clinical professor at Kelly School of Business. 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