The rebound in US stocks conceals risks: Nomura warns that the options market is underestimating the impact of inflation, Nvidia's earnings report may explode volatility

The Zhitong Finance App learned that Nomura Securities said that Wall Street was still cheering for a weak employment report last week, but the market was almost defenseless against inflation data that could disrupt the entire rebound this week.

Last Friday's less-than-expected non-farm payrolls data (NFP) was interpreted as a dovish signal — traders excluded pricing from the Fed's September rate hike. But it's a double-edged sword: the weak labor market also faces the risk of reviving recession fears when CPI and PPI data are released this week. According to common sense, options traders should be prepared for a “hot” inflation data, as this will pull the market narrative back from “the Federal Reserve can relax its policy” to “the Fed will have trouble falling behind.”

However, Nomura Securities strategist Charlie McEligot pointed out that the options market is treating this week's inflation data as an insignificant event. Instead, traders are accumulating large numbers of protective positions near the end of the month, when Nvidia (NVDA.US) earnings reports and the Jackson Hole Central Bank's annual meeting are approaching.

Compared to other holdings panoramas that McEligot has sorted out, this phenomenon is even more intriguing. The call option bias (the measure of how much premium traders are paying to bet on further increases) is near its highest level in many years; the put option bias (the cost of downside protection) has plummeted.

Traders have accumulated a large backlog of short positions in bullish options above 7,900 points in the S&P 500 index. This arrangement may accelerate any further emptying surge. Meanwhile, below the market, systemic trend tracking funds (CTAs) focus downside triggers in an area about 4% below the current price — if the stock market breaks downward, forced closing sales may roll larger and larger in this area.

For Nvidia, options traders are pricing the huge share price fluctuations after the announcement of its earnings report.

Based on Monday's closing price of $217.55, Nvidia's equal-value cross-section combination of options due on August 28 (that is, the first expiration date after the release of its August 26 earnings report) indicates that the stock price will fluctuate around 7.8% in any direction. This means that the market expects the share price to fluctuate in the range of approximately $200 to $235 at the end of the earnings week.

Unliquidated contracts are also extremely dense, with more than 15,000 open positions each at the exercise prices of 210, 215, 220, and 225 dollars — this concentration is highly consistent with the position status of traders as reminded by McEligot: as one of the two major catalysts that the volatility market is really waiting for this month, if Nvidia's earnings report pushes the stock price to make a sharp breakthrough in any direction, this position structure could be a booster for stock price fluctuations.