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Uncertainty over the Fed's pivotal September meeting and concerns about a slowing economy has had traders playing defense with the Fed now cutting rates by 50 basis points and Powell reassuring their commitment to stay ahead of the curve. We're taking a look at how this shakes out for the options market in this segment sponsored by Tasty Trade. Amy Woo Silverman, RBC Capital Markets equity derivative strategist, joining us now to discuss. Amy, good to see you. So, um, you know, heading into this Fed meeting, I'm just curious, Amy, you know, as you were talking to clients heading into this big, big decision, what were you hearing, Amy? What were those clients telling you?

Yeah, you know, look, we, I think we've been talking about this ad nauseam, honestly. I'm a little bit glad it's over, but we, we had a big, we had a big client dinner last night and, you know, so occasionally I just make people do a show of hands. Do we think 25 or 50? And it, it was pretty 50/50 split, which was the pricing as well. But the interesting thing is, when I sort of pushed and said, look, if we do get this 50 basis point cut that supposedly we want, what do we think the stock market reaction is? And I would say the reaction was also 50/50 of whether or not this is necessarily good or not. And I think Powell had a, you know, quite a fine needle to thread for that point. Um, but, you know, I think we'll continue to see how this plays out in the days. I think it's still quite early and it's not necessarily the case that all is well quite yet.

You know, Amy, one of the things that you had pointed out in your notes ahead of this decision stuck out to me was the increase of positioning here in protections to the downside. Given the fact that we did get 50 and given the fact that maybe this does potentially raise a risk in the minds of some investors that we could see a recession, are you, are you expecting to see maybe more of, of a move into that trade?

Yeah, it's a great question and I'll tell you, when you just think about this year, I would just simply characterize the first half of this year as all about FOMO and MOMO, and we saw that in the options market through historic call buying in AI and Nvidia, and S&P and Qs. And then, you know, you got that August 5th blip, if you will, in the VIX, that huge volatility spike, that drawdown. And even though things have kind of normalized on a headline level, underneath the surface, there's been a lot of tension. There's been a lot of uncertainty. We see that in an equity skew metric, which is essentially the demand imbalance between put options to play downside versus call options, and those have ticked up dramatically. I don't think it's necessarily just a fed narrative. I think there's a lot of other volatility potholes as we head into the end of the year. But look, are people looking to hedge their portfolios? Yes, that's a conversation we're now having.

In terms of those potholes, Amy, what would be on your radar? Is it the election?

Certainly the election. Look, one scenario that came up yesterday that, you know, I'm still noodling on is we, we have November 5th is the presidential election and November 7th is the next Fed meeting, and what we're, what if we're two days in and we haven't counted all the ballots, right? Like it's, given how close this election is, I could see a scenario where we don't necessarily know yet who the next president of the United States is, and the Fed has to make a decision. They say politics doesn't matter, but look, could that influence their decision or not? I think those are the volatility potholes that investors are thinking about.

You know, Amy, one of the arguments that Powell did make in defending the 50 basis point move was he was saying it wasn't so much reactionary or a sign that the Fed was behind the curve, but rather it was the complete opposite. They were doing this to stay ahead of the curve. Do you agree with that sentiment or, I guess, where do you stand just in terms of what that reality then, more realistically, looks like?

You know, I, I think that was really interesting and to me that's very much his needed to thread the needle, you know, ahead of this. And, and I think first time will tell. The second thing I would say is going into this, there's a big concern just about, you know, growth scare. And we saw that initially kind of during this first NFPs in early August, and the market did not react well to that. And then going into this Fed meeting, we didn't see much change in positioning, mean meaning it was quite sticky. And so I think from a derivatives perspective, we'll see in the coming days how much the market is buying his narrative on that.

And so, Amy, when you look at the options market right now, it's just um, as you say, it's just not pricing in much upside here?

Yeah, you know, one thing we like to look at is we take aggregate sharp ratios of just every stock in the S&P 500. Meaning we, we take, you know, the analyst price targets, a median on that, and compare that to the risk-free rate and, and just the volatility to get a risk-adjusted return. And when you look at how sharp ratios are doing historically, they're all declining. Meaning the, the market itself is telling you that it really asymmetrically doesn't see as much upside as it does downside. Now, that doesn't necessarily mean we're going to get some massive drawdown. It just means that, you know, the upside to where we are right now is fairly limited on an aggregate basis and on a sector by sector basis.

Amy, always great to see you. Thanks for coming on.

Thank you.