Options bets blamed for amplifying U.S. stock-market plunge after hot August CPI reading

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Hotter-than-expected U.S. August inflation data was unwelcome Tuesday, but the plunge in stocks may have been exacerbated by institutional traders and others who dashed for the exits after placing big, leveraged bets via the options market on a cooler consumer-price index, according to some market watchers.

“There were rumors around about institutional call buying…large bets…and I think that’s what you’re seeing,” Art Cashin, head of floor operations at UBS, told CNBC on Tuesday. Call options give the holder the right but not the obligation to buy an underlying asset at a set price by a set time.

“It meant a lot of guys who were making a preliminary favorable bet got caught off base and they were leveraged and had to purge it out on the open,” Cashin said.

Stocks opened sharply lower and extended the plunge over the course of the session, with the Dow Jones Industrial Average DJIA, -3.94% ending the session down 1,276 points, or 3.9%, while the S&P 500 SPX, -4.32% skidded 4.3% and the Nasdaq Composite COMP, -5.16% tanked 5.2%. It was the worst one-day plunge in percentage terms for all three major indexes since June 2020.

The August consumer-price index, or CPI, rose 0.1% in August, though the year-over-year rate slowed to 8.3% from 8.5% in July. Economists had looked for a monthly fall of 0.1% that would bring the year-over-year rate down to 8%.

However, the core rate, which strips out volatile food and energy prices, rose 0.6%, for a year-over-year rise of 6.3%, outstripping expectations for a 0.3% monthly rise and a 6% year-over-year pace. The data cemented expectations for the Federal Reserve to hike the fed-funds rate by another supersize 75 basis points next week, with some fed-funds futures traders pricing in a 100 basis point move. Economists also raised their forecasts for where rates will eventually peak to above 4%.

See: Any lingering doubt that Fed will go big with next rate move has now vanished

The August CPI report “confirms my suspicion that investors were too hopeful the Fed would slow its more assertive pace of policy tightening. 75bps (basis points) is still my base case for next week’s Fed meeting, with risk to the upside (100bps) more than the downside (50bps),” said Lauren Goodwin, economist and portfolio strategist at New York Life Investments, in a note.

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