Options markets are pricing in a big swing for the Standard & Poor's 500-stock index this week, according to Goldman Sachs.
Just don't ask which direction the move will be in.
Goldman equity derivatives strategist Krag "Buzz" Gregory observes that the S&P 500 straddle — a trade that profits if the market goes at least a certain magnitude either up or down — is pricing in a gain or loss of 2.4 percent this week, based on options set to expire on Friday. As such, the S&P 500, which closed at 1,931 on Friday, would have to fall below 1,885 or rise above 1,978 this week for options traders to make a positive return on the straddle trade.
Traders will have plenty of new information to digest during a particularly busy stretch for U.S. data. The top-tier releases are backloaded to the end of the week, with the ISM Manufacturing index and nonfarm payrolls reports for September due out on Thursday and Friday, respectively. The former is expected to sink to 50.6, its lowest level since May 2013, while the latter is forecast to show that 197,000 net new jobs were added over the course of the month.
But even in light of the jam-packed calendar, the expected oscillation is significantly larger than normal.
"While the straddle price is down from a local high of 4.7 percent in August, the expected move of +/- 2.4 percent is 1.7 times its median level 1 week prior to payroll releases over the last year," wrote the strategist.
Gregory also notes that the spot level of the Chicago Board Options Exchange's VIX index, which measures the implied volatility of the S&P 500 over the next 30 days, indicates that "volatility is searching for a new home." At 23.6, the spot level of VIX is between 18, a level Goldman thinks is consistent with where the economy is in the business cycle, and 26, which constitutes recession-level volatility.
And as for the structure of the VIX futures curve, its flatness — with a range of less than 1 point for all contracts between October 2015 and April 2016 — suggests "extreme indecision," according to Gregory.
"While we wish the VIX a speedy recovery, in our view an indecisive VIX is justifiable," wrote the strategist. "The market is searching for improvement in U.S. and global economic data."