All eyes are now on Jay Powell, who will answer questions during the traditional press conference tomorrow at 1 pm ET after the interest rate decision. In our last Forward Note on Sunday, we urged you to be selective in your trades—this message hasn't changed. And despite bringing you a Signal Du Jour the day before the FOMC meeting, it doesn't mean you have to act on it as soon as you receive it. In fact, we would probably advise you to wait until we have further clarity before putting it on.
That being said, today, we'll look into IYR. Does it ring a bell? It's an ETF tracking the real estate sector in the United States. We've included it a couple of times in our Thursday Shopping List with one premise: the market tends to overpay for options on this product because there's been talk of a looming real estate crisis.
Let's take a look.
After some crazy swings in 2022/early 2023, the realized volatility is at its lowest.
The sector has recovered since the Fed announced it would start cutting rates in 2024 if the data allow. In response, the ETF's historical volatility has decreased quite significantly. At 12.66, it's the lowest over the past two years.
Meanwhile, the demand for options has likely not slowed down, and prices remain elevated—market participants are willing to pay the premium sellers ask to assume the risk.
Let's take a look at the data.