Options Bets Responsible for Amplifying US Stock Market Drop After Hot August CPI Read

Hotter-than-expected August inflation data in the US was unwelcome on Tuesday, but the stock’s decline may have been exacerbated by institutional traders and others racing for exits after making large bets through the options market leveraging a cooler consumer price index. according to some market viewers.

“There were rumors about buying institutional calls…big bets…and I think that’s what you’re seeing,” Art Cashin, chief of operations at UBS, told CNBC on Tuesday. Call options give the holder the right, but not the obligation, to buy an underlying asset at a specified time at a specified price.

“It meant a lot of guys who were making a preliminary favorable bet got caught off base and they had leverage and had to make it public,” Cashin said.

Shares opened sharply lower, extending the session’s plunge, with the Dow Jones Industrial Average DJIA,
-3.79%
fell about 1,200 points, or 3.7%, in late afternoon trading, as the S&P 500 SPX,
-4.19%
slipped 4.1% and the Nasdaq Composite COMP,
-5.03%
4.9% fueled.

The August consumer price index, or CPI, rose 0.1% in August, although the year-over-year rate slowed from 8.5% in July to 8.3%. Economists had been anticipating a monthly decline of 0.1%, pushing the annualized yield to 8%.

However, core rates, excluding volatile food and energy prices, rose 0.6%, up 6.3% year-on-year, beating expectations for a 0.3% monthly increase and an annual increase. on-year rate of 6%. The data bolstered expectations for the Federal Reserve to raise Fed funds rates by another 75 basis points next week, with some Fed futures traders charging a 100 basis point price hike. Economists also raised their forecasts for where yields will eventually peak above 4%.

To see: Any lingering doubts that the Fed will get big with the next rate hike is now gone

The August CPI report “confirms my suspicion that investors were too hopeful that the Fed would slow its more assertive pace of policy tightening. 75 bps (bps) is still my baseline scenario for next week’s Fed meeting, with higher risk (100 bps) than downside (50 bps),” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments. a note. .

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