The election has passed, and it is sort of difficult to determine exactly how a Trump administration will impact the financial markets and the economy. Most of the talking heads express a wait-and-see attitude and I agree that may be the best approach at this time. Despite the uncertainty, we still have economic numbers to digest, and the Consumer Price Index (CPI) is on deck this coming Wednesday before the market open.
Last month, the CPI reaction was a yawn, with NDX rising 0.15%. Note there are a couple of other non-reactions on the chart below, both of which were followed by reactions that were higher than the average move of +/-1.21%. Depending on the option pricing late Tuesday, there may be a long NDX volatility trade opportunity using options expiring on Wednesday.
Data Sources: Bloomberg & Author Calculations
We track the 1-Day at-the-money (ATM) straddle pricing on the close the day before and on the close of the report day. The graphic below shows these two pricing observations.
Data Sources: Bloomberg & Author Calculations
The NDX straddle pricing was higher than the settlement value seven of the last twelve CPI report days. However, a consistent seller of the 1-Day ATM straddles the day before CPI who holds it into the close would have realized a net loss of about 306 points. We would like to highlight the January and August results where the straddle overpriced the move by well over 100 points. The reports that followed this overpricing (February and September) were both winners for straddle buyers.
Finally, here’s a successful trade around CPI from last month. About 40 minutes into the trading day on October 10, a trader put on a neutral to bearish one day trade trading using NDX options by selling 100 NDX Oct 10th 20390 Calls for 5.10 and buying 100 NDX Oct 10th 20490 Calls for 1.10, taking in a credit of 4.00. The payoff diagram below highlights the profit and loss at expiration along with some other significant levels.