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Market Events

Tuesday, October 1st 2024

Large Moves Expected for the Election and Friday’s Unemployment Report

With the U.S. election and a critical unemployment report approaching, options markets are pricing in large swings. Implied volatility suggests significant moves in major ETFs, with traders preparing for uncertainty in both the short and long term.

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Summary

As the U.S. presidential election on November 5, 2024, and the unemployment report on October 4, 2024, approach, the options market indicates significant expected volatility. Traders are preparing for large price swings, particularly in major ETFs, with the election anticipated to drive more volatility than the unemployment report. Implied volatility has increased notably for both events, reflecting market sentiment and potential impacts on sectors sensitive to economic changes. Traders should analyze these developments to navigate the uncertain market landscape effectively.

As the U.S. approaches two major events—the presidential election on November 5, 2024, and the unemployment report due on October 4, 2024—the options market is signaling large, outsized moves. Traders are betting heavily on these events, and the resulting shifts in implied volatility reflect significant expectations for market movement. These two key dates are poised to shape market sentiment, with options traders bracing for short-term and longer-term volatility.

By analyzing implied volatility's term structure and isolating these events' effects, ORATS provides insights into how traders are positioning themselves for potential price swings. This article will break down the significance of these events, explain how implied volatility is calculated, and provide traders with actionable insights for navigating these uncertain times.

Election Driving Volatility into November

The U.S. presidential election, set for November 5, 2024, is driving volatility into November as options traders anticipate significant price swings surrounding the election and its aftermath. The closest relevant expiration date is November 8, 2024, just three days after the election. This expiration date has only been active for three trading days, but it is already showing elevated implied volatility compared to expirations before the election. The chart below illustrates how the November 8 expiration stands out regarding implied volatility and open interest.

The SPY (S&P 500 ETF) chart shows that, while open interest for the November 8 expiration is relatively low due to limited trading activity, market makers already imply a move of nearly 2% on expiration day. This reflects traders’ expectations of significant market volatility surrounding the election. Traders are positioning for potential price swings as the market reacts to election results and policy changes, particularly in politically sensitive sectors such as healthcare, energy, and technology.

As we approach the election, implied volatility for the November 8 expiration will likely increase as uncertainty rises, reinforcing the notion that traders are bracing for substantial moves.

Unemployment Report: A Near-Term Driver of Volatility

However, before the election, the market will be heavily focused on the release of nonfarm payrolls and the unemployment rate, scheduled for Friday, October 4, 2024. This report will be released at 8:30 AM, and traders are closely watching these critical economic indicators to gauge the health of the economy and assess potential Federal Reserve actions.

The October 4 expiration shows a marked increase in implied volatility, signaling that the market is anticipating a substantial move following the report. The implied volatility has risen from 22.1% to 28.8%, translating into an expected move of approximately 2%. This can be seen in the following chart of the IWM (Russell 2000 ETF), which shows the significant increase in volatility for the October 4 expiration.

This spike in implied volatility indicates that traders are preparing for potential surprises in the unemployment data. Whether the report beats or misses expectations, it is likely to significantly impact overall market sentiment, particularly for sectors sensitive to economic growth. The unemployment report is expected to influence traders' views on inflation and future Federal Reserve actions, further driving volatility.

Event Implied Moves Across Major ETFs

To quantify how the market is pricing in moves for these two events, we can look at the implied moves for three major ETFs: SPY (S&P 500), QQQ (Nasdaq 100), and IWM (Russell 2000). The table below highlights the implied moves for both the unemployment report and the election.

As the table shows, the market is pricing in larger moves for the election than for the unemployment report across all three ETFs. The IWM ETF, which represents smaller-cap, more volatile stocks in the Russell 2000, implies the largest moves, with a nearly 3% expected swing for the election. This is a significant indication of how smaller-cap stocks, more sensitive to macroeconomic events, are expected to react to the election results.

While the implied moves for the unemployment report are smaller than those for the election, they are still notable. SPY is pricing in a 1.1% move, QQQ at 1.4%, and IWM at 1.9%, reflecting traders’ anticipation of potential market shifts based on the outcome of the unemployment data.

Term Structure Analysis: A Tool for Market Expectations

Implied volatility is a critical tool options traders use to gauge market expectations for future price swings. By analyzing the term structure of implied volatility—how volatility varies across different expirations—traders can gain insight into how the market is pricing in uncertainty around specific events.

The term structure for the election shows a sharp increase in volatility for the November 8 expiration, indicating that traders are bracing for a major event that could cause significant market moves. Similarly, for the unemployment report, the term structure for the October 4 expiration shows a large increase in volatility, suggesting that traders expect market swings based on the report’s outcome.

Market Effect Isolation: Focusing on Key Events

One of the challenges of analyzing implied volatility is isolating the impact of specific events. In the options market, volatility can be influenced by various factors, including earnings reports, macroeconomic data, and geopolitical events. To focus on the election and the unemployment report, ORATS isolates these events by comparing the implied volatilities of expirations that include these events with those that do not.

This method of isolating event-driven volatility is critical for traders who want to develop targeted strategies and understand how the market reacts to key catalysts like the election and unemployment report.

Conclusion: Insights for Traders

With both the U.S. presidential election and the unemployment report driving market volatility, traders need to be prepared for potential market swings in the coming days and weeks. By analyzing the term structure of implied volatility and isolating the effects of these key events, traders can gain valuable insights into how the market is pricing in uncertainty.

As the election and unemployment report approach, traders should remain vigilant, understanding that these two events are set to shape market sentiment and drive volatility. By using tools like ORATS’ term structure analysis, traders can position themselves for success in an uncertain market environment.

Disclaimer:

The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.

All opinions are based upon information and systems considered reliable, but we do not warrant the completeness or accuracy, and such information should not be relied upon as such. We are under no obligation to update or correct any information herein. All statements and opinions are subject to change without notice.

Past performance is not indicative of future results. We do not, will not and cannot guarantee any specific outcome or profit. All traders and investors must be aware of the real risk of loss in following any strategy or investment discussed herein.

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Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.

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The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors. For more information please see our disclaimer.
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