Banks report earnings this week. Options traders are pricing in big moves. The financial sector is flat on the year.
Let me walk you through what happened here. Someone looked at implied volatility. Saw a number. Wrote "big moves expected" in a headline. Then admitted in the same breath that banks have gone nowhere for twelve months.
The options market expects something. Always does. Expectations are its only product. It's like saying the lottery expects someone to win. Technically true. Completely useless.
Higher rates are supposedly the thing investors are weighing. Been weighing them for two years now. Still weighing. Must be using a really complicated scale. Maybe one of those old timey ones with the little sliding weights that no one knows how to read anymore.
Flat on the year means every genius who bought January 1st has made nothing. Worse than nothing after inflation. Worse than that after commissions. But this week could be different because options traders—the same people who've been wrong for twelve consecutive months—suddenly feel nervous.
Here's what the options market actually expects: premiums. Wants you to buy straddles on Wednesday morning. Wants you to feel smart about hedging. Wants to sell you insurance on a house that hasn't burned down in a year and probably won't burn down this week either.
The real move happens Thursday at 9:31 AM when some retail trader finally understands that implied volatility and actual volatility are not the same thing. By then his contracts expire worthless and the options market prices in next quarter's big moves.
Banks will beat or miss by two cents. Stock will move three percent in either direction. CNBC will call it a monster reaction. Everyone resets for next quarter. The wheel keeps spinning and somehow you're still the hamster.
Photo by Tyler Prahm on Unsplash
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