Hedge Event Risk Going into End of Week - Analyst (SPY) (VXX)

July 31, 2012 2:48 PM EDT
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As central bankers take center stage this week, investors are considering options to hedge event risk. Three central banks are expected to make announcements this week including the Fed on Wednesday and both the BOE and the ECB on Thursday.

Many are predicting that the ECB’s announcement will be the most news worthy and will likely stir up plenty of action. Then again, investors remain split on what exactly the Fed is going to do, and we all know the affect this uncertainty can have on markets. At any rate, central bank announcements are likely to create plenty of volatility going into the back-half of the week.

Amidst the onslaught of central bank policy decisions, plenty of economic data will be hitting the wire as well, including the ISM and APD employment on Wednesday, and non-farm payrolls on Friday.

Given the significantly high levels of event risk, analysts at MKM Partners believe that there is demand for short-term hedges and long volatility exposure.

“With implied volatility low on a relative basis, a range of options strategies can be deployed to manage the potentially adverse outcome,” stated Jim Strugger, a derivatives strategist at the MKM Partners.

He recommends the SPDR S&P 500 ETF (NYSE: SPY) weekly Aug 3 expiration 138/135 put spreads and iPath S&P 500 VIX ETN (NYSE: VXX) 14 strike calls as two ways investors can hedge against a likely pick-up in implied volatility later this week.

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