(Bloomberg) -- The U.S. stock market is bracing for an unusually volatile session this Wednesday, as the convergence of major tech earnings and a pivotal Federal Reserve meeting has options traders on high alert. The SPDR S&P 500 ETF (SPY) hovered near $714.91 in recent trading, with options pricing suggesting a potential for sharp moves in either direction.
"The market is pricing in no rate cuts until the middle of next year," said Lawrence Gillum, chief fixed income strategist for LPL Financial, who expects a "pretty boring meeting" in terms of immediate policy changes. However, the combination of the Fed's statement with earnings from four of the market's most influential companies creates a potent mix for volatility.
The options market reflects this tension. Implied volatility for bearish puts on the SPDR S&P 500 ETF is slightly elevated compared to bullish calls, a sign that investors are actively hedging against a potential downturn. The CBOE Volatility Index (VIX), Wall Street's so-called "fear gauge," has been closely watched. Adding to the day's events, a Senate Banking Committee vote is scheduled on Kevin Warsh’s nomination to lead the Federal Reserve, and the Supreme Court may rule on presidential authority over the central bank.
At stake is the market's near-term direction, which has been heavily reliant on the performance of the "Magnificent Seven." Amazon.com, Alphabet, Meta Platforms, and Microsoft are all set to report quarterly results after the bell on Wednesday, followed by Apple on Thursday. While options show a bullish tilt for most of these names, Alphabet's contracts are skewed slightly bearish, reflecting concerns about its competitive standing in artificial intelligence. The U.S. 10-year Treasury yield and the price of crude oil will also be in focus as traders digest the Fed's commentary on inflation, which saw a 3.3% year-over-year jump in the last consumer price index report.
Aggressive investors are considering strategies to navigate the potential turbulence. One such strategy is the risk reversal on a stock like Meta, which involves selling an out-of-the-money put to finance the purchase of an out-of-the-money call. For example, with Meta trading around $677.20, a trader could sell the May $670 put and buy the May $685 call, positioning for a rally while defining the risk of being assigned the stock at a lower price.
For those anticipating a broader market decline, a put spread on the SPY ETF offers a defined-risk way to bet on a downturn. By buying a put at one strike and selling another at a lower strike, investors can cap both their potential profit and their initial cost. For instance, buying the May $706 put and selling the May $690 put would cost approximately $1.72, with a maximum potential gain of $14.28 if the ETF closes at or below $690 at expiration.
This article is for informational purposes only and does not constitute investment advice.
