US options traders have their eyes firmly fixed on Buenos Aires this week, and they are increasingly confident the meeting there of the heads of the world's 20 largest economies means one thing: more volatility.
The persistent trade tensions between the United States and China are likely to dominate the G20 summit hosted by Argentina on November 30 and December 1, with US President Donald Trump and Chinese Premier Xi Jinping set for direct talks on Saturday.
On Monday, Trump said he expected to move ahead with raising tariffs on $200 billion in Chinese imports to 25 percent from the current 10 percent and repeated his threat to slap tariffs on all remaining imports from China.
Given the sensitivity US stocks have displayed of late to any trade-related headlines, traders are braced for an additional dose of volatility around the meeting. After their biggest gain in more than two weeks on Monday, Trump's salvo after the market closed has re-established an air of caution on Wall Street, and on Tuesday stocks were weak.
The options tied to the S&P 500 Index's tracking fund, known as the SPDR S&P 500 ETF Trust are exhibiting higher volatility in the short-term expirations ahead of the G20 meeting, according Chicago-based volatility and options data firm ORATS.
"The elevated levels suggest a market expected move of 2 percent this week," said ORATS founder Matt Amberson.
S&P 500 contracts expiring on December 7 also exhibit elevated volatility levels, data from Trade Alert showed.
While a 2 percent move is roughly in line with the S&P 500 Index's weekly gyrations over the last 10 weeks, the volatility premium embedded in these near-term contracts underlines how important the summit could be to shaping expectations for how the fraught trade relationship between the United States and China will weigh on equities.
Stocks have already had a rough two months, with major US benchmarks sliding back into their second correction of the year and rising worries over the trade scene a big contributor to investor unease.
"If the US still continues on a path towards escalation of the trade dispute with China after the G20 meetings, we can infer that economic considerations are slipping in the administration’s policy agenda," UBS Global Wealth Management Chief Investment Officer Mark Haefele said in a note on Monday.
"Against such a backdrop, investors would be right to demand higher risk premia," he said.
To be sure, the summit might not be the only event on traders' minds.
Close attention will be paid to a speech on Wednesday by US Federal Reserve Chairman Jerome Powell and to minutes from the central bank's November 7-8 meeting to be released on Thursday for clues to the path of future interest rate hikes.
"What I look for is volatility to begin to increase as we head into Fed minutes and then the G20. Those back-to-back events will be the primary volatility driver this week," said J.J. Kinahan, chief market strategist at TD Ameritrade in Chicago.
"I would look for more premium buyers on both sides as many start to collar their risk," he said.
While it was difficult to say whether anxiety ahead of the G20 meeting was wholly responsible for the volatility premium embedded in the near-term options, the summit certainly was one thing playing on options traders' minds, said Jon Cherry, global head of options at Northern Trust Capital Markets in Chicago."Our clients in particular have been proactively hedging over several months of 2018 and we see that trend continue," he said. "Hedging out to the end of the year and protecting gains is definitely something we have seen."