Analysts at JPMorgan Chase say the Federal Reserve has 670 billion reasons to deliver a "dovish hike" if it elects next week to raise interest rates for the first time in nine and a half years.
The consensus view is that the central bank will take care to avoid upsetting risk appetite at the time of liftoff by emphasizing a gradual glide path higher for rates, lowering the "dot plot" of preferred policy rates, or inserting language that ties additional hikes to actual increases in inflation. A return to robust monthly jobs growth and nascent signs of accelerating wage increases have, however, left more than a few economists doubting that a hike will be accompanied by overtly dovish messaging.
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A report from JPMorgan's global quantitative and derivatives team, led by Marko Kolanovic, emphasizes the necessity of not roiling the markets. Extenuating circumstances in the options market could provoke a wave of selling pressure in equities precisely when the Fed seeks to ease markets into a new rate regime, Kolanovic warned.
"This important event falls at a peculiar time–less than 48 hours before the largest option expiry in many years," wrote Kolanovic, noting that $1.1 trillion worth of Standard & Poor's 500-stock index options–of which $670 billion are puts–will expire on Dec. 18. Roughly one-third of the puts poised to expire are at or near the money, with strike prices from 1,900 to 2,050.
There are five flavors of SPX options:
The standard AM settled options that expire on the morning of the third Friday of the month (SPX). These are floor traded and usually have wide spreads bid/ask spreads. Their expiration value is published under the ticker SET (^SET for Yahoo Finance).
Four PM settled flavors: the Weeklies (SPXW), the End of Month (SPXW), the Quarterlys (SPXW), and the PM version of the SPX (SPXPM) that settles Friday afternoon. The first three show up under the SPX symbol in option chains, the SPXPM options show up in their own chain. The Quarterlies will trump the Weeklys, The End of Month, if they all fall in the same week. The PM expiring options use the standard S&P 500 Friday close SPX (^GSPC for Yahoo Finance) as their expiration value.
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