Source: Golden Ten Data

Traders are keeping a close eye on this week's US inflation data and$NVIDIA (NVDA.US)$According to financial reports, it is expected that these two major events will disrupt the calm in the market.

Citigroup said that the options market is betting that after the US April CPI report is released on Wednesday, the S&P 500 Index (SPX) will fluctuate 0.9% based on the average cross-option price of the day. Traders will be watching the report closely to find signals about the extent of the Federal Reserve's potential interest rate cuts.

Note: An equalized cross-modal option refers to a call option and a put option where an investor simultaneously buys or sells the same underlying asset with the same maturity date at the same execution price.

Market volatility has abated as the US is about to release its latest CPI report. The VIX index, which measures the volatility of the S&P 500 index, is close to this year's low, while the volatility of VIX options used to hedge against sharp market sell-offs is at its lowest level in nine years. Meanwhile, since the Federal Reserve's interest rate decision on May 1, the US Treasury bond market has been inclined to bet on larger interest rate cuts.

Meanwhile, on May 23, the day after Nvidia released its latest earnings report, the market was also preparing to face similar fluctuations on CPI night. Although employers reduced the recruitment scale in April, indicating that the labor market has cooled down after a strong start at the beginning of the year, the implied volatility of the market on that day is still greater than the situation after the latest non-farm payrolls report will be released on June 7.

Stuart Kaiser, head of US stock trading strategy at Citigroup, said, “Inflation has been the focus of traders' attention for the past two years, and this is still the case. Despite recent signs of cooling in the job market, investors will generally be satisfied as long as the data shows that more than 150,000 new jobs were added in the same month, as this still reflects the strength of the labor market. If employment growth falls below this level, the market will begin to turn its attention to recruitment growth rather than inflation.”

Overall, declining market volatility and lower put option premiums make broader stock market hedging more attractive. Last week, some traders used bullish spread options to bet that VIX would rise.

Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, said, “Higher interest rates have boosted S&P 500 forward contracts, thereby increasing the premium of call options over put options. This makes the collegial strategy of selling and buying call options more convenient. The decline in the S&P 500 options slope (skew) (close to the low in the past 10 years) has also reduced the cost of this strategy.”

US Treasury bond market positions before the inflation report was released seem to have been neutralized, as the market has seen short recovery and new long positions since the latest policy statement issued by the Federal Reserve and the April employment report.

After the Federal Reserve's interest rate decision in May, SOFR futures showed a clear shortfall, as Federal Reserve Chairman Powell seemed to eliminate the tail risk of raising interest rates as the next policy move. The bulls then began to increase. Recent options suggest that tail risk hedging has moved to a more aggressive path of interest rate cuts, and some SOFR Options' positions are even focused on the possibility of interest rate cuts as early as July.

A large-scale risk reversal options transaction appeared on the treasury bond market late last week. The deal involved options due on May 24. The goal was to reduce the yield on 10-year US Treasury bonds to 4.25%. If the target is achieved, the profit will be as high as 15 million US dollars; if the yield rises to around 4.7%, the loss is as high as 15 million US dollars.

Editor/jayden