The market’s focus on potential inflation has been overshadowed by the recent market reactions to tariffs. However, if upside inflation pressures start to arise, this could result in another leg lower for stocks as the market is expecting multiple rate cuts in 2025. If inflation is trending up, it will be more challenging for the Fed to support the economy through lower interest rates. This factor makes Thursday’s CPI release a major focus for the financial markets this week.
The table below summarizes Nasdaq-100 (NDX) price changes and option activity around the last twelve CPI reports. The average move for NDX on CPI Day is +/-1.16%, 0.22% higher than the average NDX day over the same period of +/-0.94%. Last month, NDX moved up by 1.13%, just a bit lower than the average move. We track performance for selling 1-day ATM straddles and on the last twelve CPI Days this figure has overpriced the subsequent move six times and underpriced six times. The cumulative losses from selling a 1-day ATM straddle on the close the day before CPI and exiting at settlement on CPI Day would result in total losses of just over 177 points.
Sources: Barchart.com and Author Calculations
The next chart shows the last twelve NDX price changes on CPI Day. The four most recent NDX changes were positive with the two most recent coming in just under the average move. Not included in the data, but the average move over the previous twelve months was about 1.3% at the end of 2024 so this figure has been trending lower. This was mostly a function of no real surprise in the recent CPI releases along with inflation slowly trending lower.
Sources: Barchart.com and Author Calculations
The final graphic shows the NDX 1-day ATM straddle premiums, based on the mid-point of the bid-ask spread. The dark blue line represents the straddle value based on the close the day before a CPI announcement and light blue line the straddle value at settlement on CPI Day. Note that there are a few outlier days when the price changes was much greater than the ATM straddle price.
Sources: Barchart.com and Author Calculations
Finally, the excess market volatility this week may result in an expensive straddle on Wednesday’s close using Thursday’s options. However, the higher premium may be justified based on the current market environment more than the anticipation of a CPI reaction.
