Trading Nation

There are two events ahead that could be big stock market movers, Wells Fargo says

Summer events could trigger big market swings

Every strike in the U.S.-China trade war has captivated markets this month, sending the tumbling 3% and the VIX volatility index racing to 2019 highs.

But, with Wall Street so focused on the short term, the options market may be discounting even more big swings coming down the pipeline.

"What we've seen with the options market is that it often tends to price events in at the very last minute," said Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo, told CNBC's "Trading Nation" on Tuesday. "A lot of times the options market is very slow about doing so."

For example, in the lead-up to the midterm elections last year and the 2016 presidential election, the options market did not price in elevated volatility until at least two weeks out from the event.

Chintawongvanich now sees a similar setup for two market-moving events in June: the Federal Open Market Committee's meeting and the G-20 Osaka summit in Japan at the end of the month. The G-20 summit, especially, could break new ground in trade negotiations when U.S. President Donald Trump and Chinese President Xi Jinping meet.

"But, if you look at the options market, they're not pricing in a ton of event risk or event premium around that event," said Chintawongvanich. "The options market is pricing in a lot of volatility in the next one to two weeks which makes sense given we're playing headline pingpong here with the markets with any tweet moving the market up or down."

S&P 500 forward volatility through to May 24 is expected to come in at 19.3, Chintawongvanich said. However, the options market is currently looking for volatility relatively subdued at below 16 in June. That means that options covering that period are comparatively cheap, he said.

"A lot of people kind of bought protection when the trade stuff first started flaring up a couple of weeks ago. If you have stuff that's expiring soon … I would suggest definitely look at some of those options and what we call rolling them out, so selling those near-dated options and buying options that expire on July 5. That will capture both the G-20 meetings, June 28 and 29, and the next FOMC meeting."

Markets are discounting these major events this June, Wells Fargo says