As volatility traders we're mostly concerned with statistics. We try to deploy high probability trades in the options market when conditions fit our strategy and risk profile.
Although we may not make trades based on directional trends in underlying markets, we aren't fully insulated from such moves either.
For example, it’s advisable to steer clear of selling premium in single stock names that are facing bankruptcy or litigation risk. This type of exposure can open the door to significant losses.
Likewise, volatility traders also need to monitor the calendar for upcoming macroeconomic events to ensure their portfolio isn’t overexposed to market-wide risk.
Since the price of oil rebounded in February of this year, the market's sensitivity to macro events has been fairly muted. The method in which the world's equity markets shrugged off the "Brexit" decision is a paramount example of this indifference.
With nearly three quarters of the year fading in the rear-view mirror, it's interesting to look out on the horizon and identify some of the remaining macro events left on the 2016 calendar.
On a continuing basis, the weekly crude oil inventory numbers (released Wednesday morning at 9.30am central) are certainly worth watching. As global production decreased due to lower prices, crude oil and gasoline inventories have been steadily falling in the United States. The question is whether this trend continues at its current pace, if it speeds up, or if it reverses.
The recent draw in both crude and gasoline inventories (mid-August), alongside the specter of an upcoming OPEC meeting at the end of September (to discuss potential supply cuts), has catapulted crude oil back towards $50/barrel. Increasing drawdowns in crude oil inventories could push oil to $60 or above, while increasing stockpiles (and a failure by OPEC to act) could push it back down to $40.
The monthly jobs report released by the Labor Department during the first week of every month (next scheduled for September 2nd) is another metric to follow closely through the end of the year. If another 200,000+ jobs were created in August (following the trend of June and July), the Federal Reserve may finally have the confidence it needs to raise rates another quarter percent at their September 20-21st meeting.
If job creation looks good on September 2nd, and inflation metrics are starting to increase - there's certainly a good chance the Fed will act.
One potential caveat to any movement by the Fed in September might be that other macro event that’s scheduled for late fall - the US presidential election on November 8th. While most forecasts suggest that Hillary Clinton possesses a strong lead in that contest, any surprises or changes in polling numbers could significantly affect market volatility if Republican candidate Donald Trump gains any meaningful ground in the interim.
Another event that hasn't garnered a lot of press through this point is the referendum on constitutional reforms that will occur in Italy sometime between October and December (consensus appears to suggest it will be held in late November). Given that news from Europe has affect market volatility in the past, this event must also be kept on the radar as it draws closer.
A critical component of portfolio management is the constant evaluation of risk exposure at both the individual symbol and market levels. While positional risk may be deployed according to our view on implied volatility, market-wide risk may affect the scale and/or timing of that exposure.
If you have any questions about upcoming macro events, or risk management in general, we hope you'll reach out at firstname.lastname@example.org or leave a comment below.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Upcoming Macro Events:
Weekly inventories (Wednesdays at 9:30am central)
OPEC meeting September 28-29
US Presidential Election - November 8th
Italian Referendum - Expected in late November
US Federal Reserve (FOMC)