Tomorrow the FOMC will announce both its decision on rates and its outlook for the future. The /ZQ[Z6] Fed Fund Futures prices indicate a 97.4% chance of a hike (according to the CME’s FedWatch Tool) of the target area from 25-50 basis points to 50-75 basis points. A graph of the yield curve since the election shows that Bonds and Notes have both anticipated this move as well. Implied Volatility (IV) is still elevated ahead of this binary event. Is this an opportunity to sell uncertainty?
A graph of the Implied Volatility in the Notes (/ZN) and Bonds (/ZB) was displayed. The graph showed that the IV has tightened in both. Tom noted that, “The Volatility is still being bid up around tomorrow's uncertainty. The yield curve in the Notes was more attractive than the curve in the Bonds.On a relative basis there is more risk for the Notes. There is a lot more time for 30 year paper to normalize than 10 year paper.”
To properly compare differences in IV and Volatility Skew between different products it’s best to look at the distance from the at-the-money (ATM) strike as a percentage, rather than a flat number. Such a graph comparing the /ZB Volatility to the /ZN Volatility was displayed. The graph showed that the out-of-the-money (OTM) options in the Notes are relatively more expensive.
The most common way of quoting skew is a “risk reversal.” This gives us a solid number instead of a visualization. A table of the Implied Volatility and the 10 Delta Risk Reversal on the Bonds, Notes and the Dollar was displayed. The skew in Notes is much flatter than the skew in Bonds. This provides opportunities for selling premium using Delta Neutral strategies such as Strangles and Iron Condors.
Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of how Volatility shifts before binary events and methods for trading these events.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.
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