Get ready with this trading guide! The Jackson Hole annual meeting is approaching, and Powell's speech will be the focal point.

The annual gathering of global central banks—the Jackson Hole Economic Policy Symposium—is about to commence!

Powell will deliver a keynote address at the Jackson Hole global central bank meeting on August 22 at 10 AM Eastern Time (10 PM Beijing Time). The theme of this meeting is: 'Economic Outlook and Framework Review.'

For Wall Street, apart from the unwavering eight Federal Reserve meetings each year, the most anticipated event at the macro monetary policy level is perhaps the annual Jackson Hole global central bank meeting.

Why does the Jackson Hole global central bank meeting attract such significant attention from industry insiders?

Looking back through history, it is easy to find the answer: delivering keynote speeches and revealing shifts in monetary policy at the Jackson Hole global central bank meeting has long been a tradition among central bank governors, particularly former Federal Reserve Chairs.

It is noteworthy that in recent years, significant volatility in the U.S. stock market often occurs around the time of Powell's speeches at the Jackson Hole meeting.

For instance, in 2022, Powell's speech caused a dramatic plunge in the U.S. stock market, with the theme of 'pain' directly leading to a decline of 3%-4% in the three major U.S. stock indices within just nine minutes.

The market also experienced considerable turmoil in 2023; however, on the Thursday before Powell's speech, the Dow Jones Industrial Average registered its largest point drop in five months, while the Nasdaq fell nearly 2%.

In 2024, Powell sent the strongest signal for interest rate cuts, with the S&P rising over 1% on the same day. By September of last year, the Federal Reserve did indeed initiate the first rate cut in a series of reductions, implementing a significant drop of 50 basis points.

Of course, a piece of good news at the moment is that historically, aside from the market crash triggered by the Jackson Hole global central bank annual meeting in 2022, this annual central bank event has generally been beneficial for U.S. stocks.

Timing for the September rate cut?

From the pricing in the interest rate market, the market almost unanimously expects the Federal Reserve to cut rates by 25 basis points next month, and at least one more cut before the end of the year.

Regarding Powell's highly anticipated speech this week, many investors expect that Powell will attempt to avoid completely unsettling the market's interest rate bets, while also potentially reminding the public that the policy decision at the next Federal Reserve meeting on September 17 will depend on data reports leading up to that meeting to confirm whether the labor market is cooling and inflation is being controlled.

Considering that there are still a series of data yet to be released before the September meeting, Nomura expects Powell will not provide a 'clear commitment' on Friday. Bank of America even anticipates that Powell will maintain a hawkish stance, contrary to the market's easing expectations. Morgan Stanley, on the other hand, expects Powell to continue emphasizing inflation risks in his speech, resisting the market's rate cut expectations.

In addition to hints regarding the policy rate path, the market also anticipates that Powell will use this speech to provide more clues regarding the ongoing review of the Federal Reserve's policy framework.

Nomura predicts that this year's review may largely reverse the framework reforms of 2019, in order to more equitably reflect the current risks posed by inflation and interest rates.

Specifically, the FOMC may abandon the "flexible average inflation targeting framework" and reaffirm that the tight labor market is one of the sources of inflationary pressure. Furthermore, the review may explicitly indicate that monetary policy needs to take into account inflationary pressures arising from persistent supply shocks.

How should investors utilize options investments?

Currently, the market focus is not only on "whether to cut interest rates," but also on the wording and logic of Powell's speech. If his stance is dovish, the market will price in interest rate cut expectations in advance, leading to a decline in bond yields, a weakening of the dollar, and a short-term strengthening of risk assets; conversely, if his stance is hawkish, yields will rise, the dollar will strengthen, and risk assets will be under pressure.

If investors anticipate that the wording will be dovish, thereby driving U.S. stocks higher, they can adopt a bull call spread strategy. That is:

Objective: If you expect the market to maintain an upward trend, then this strategy is appropriate.

Strategy: Buy one call option with a lower strike price and sell another call option with a higher strike price, both having the same expiration date.

Advantages: Limited profit and loss. If the underlying stock rises, the portion of the higher strike price Call B that is sold limits the maximum profit. Maximum profit = [(Call B strike price - Call A strike price) - net option premium] * contract multiplier * number of contracts. If the underlying stock falls, the maximum loss is limited, with maximum loss = net option premium paid * contract multiplier * number of contracts.

For example: If you believe that the S&P 500 index will rise, you can buy a call option at a lower strike price (e.g., 6300) and sell a call option at a higher strike price (e.g., 6600).

If investors anticipate that the language of this statement will be hawkish, leading to a correction in the U.S. stock market, they may consider protective put options. Specifically:

Objective: This strategy is useful if you wish to guard against potential downside risks.

Strategy: Purchase put options for stocks or indices that you already own.

Advantage: This provides downside protection, ensuring that you can sell the underlying asset at the exercise price of the put option, thereby limiting potential losses.

For example: If you hold a position in the S&P 500 index and are concerned about a potential short-term decline, you could hedge your portfolio by purchasing put options at a strike price slightly below the current market level.

Overall, after the Jackson Hole meeting, market participants are likely to rapidly focus on the non-farm payroll data for August, set to be released on September 5, to see if it paves the way for a loosening of policy in September, and potentially indicates the possibility of an unexpected rate cut of 50 basis points. However, it is certain that several investors and traders have indicated that such a significant rate cut seems unlikely at this time, following last week's strong PPI report.