CPI Release Puts Options Traders on High Alert for Potential Swings

The S&P 500 Index is predicted to move 0.9% in either direction on Tuesday, the largest shift ahead of a consumer price index announcement since April 2023, according to Citigroup's Stuart Kaiser. It's derived from a trading strategy called an at-the-money straddle, which occurs when a trader purchases an equal number of options and puts with the same strike price and expiration.

Additionally, the reading exceeds the suggested move for the Federal Open Market Committee meeting next Wednesday.

With the advent of zero-day-to-expiry options, traders can now open bets against particular events. According to Citi strategists, the majority of the increase in options pricing on the S&P 500 is focused in the very near future.

In January, US consumer prices climbed at a rate surpassing forecasts, driven largely by a significant increase in rental housing costs. This news triggered a 1.4% fall in the benchmark stock index on February 13, the day the figures were made public. "Following the unexpectedly robust report from last month, there's definitely a heightened sense of apprehension about the upcoming figures. This anxiety is likely to contribute to today's jitteriness in the options market," commented Matthew Tym, the chief of equity derivatives trading at Cantor Fitzgerald.

The Consumer Price Index is expected to rise to 0.4% MoM in February from 0.3% in January, which would be the largest increase since last September, according to the data provided by Bloomberg. February's year-over-year CPI gain is expected to remain at 3.1% for the second consecutive month.

The S&P 500 has only experienced declines on four occasions coinciding with the release of CPI reports over the past year. There has been a notable uptick in trading day volatility, according to Bloomberg's Rita Nazareth. Specifically, in the last six months, the index has consistently witnessed movements of at least approximately 0.8% in either direction on CPI days. This is a significant increase compared to the sub-0.5% fluctuations recorded for the period ending in September of the previous year.

This pattern reflects a growing responsiveness in the market to inflation data. In contrast, last year saw a more subdued response from the stock market to CPI updates, during a phase when inflation appeared to be easing.

Analysts at Citi have recommended purchasing options on the index to attain positive gamma. By maintaining this position through the CPI report release, traders can benefit from anticipated stock volatility, which is likely to increase both the price of options and market volatility. Subsequently, traders can potentially repurchase their positions at lower prices if the market adjusts after the initial reaction. Then repurchasing the option position at lower levels.