There are a handful of economic numbers that get extra attention from traders and pundits. The monthly Non-Farm Payroll (NFP) release is at the top or near the top of the list of important economic numbers. NFP figures are normally a first look at the previous month’s economic activity and include inflation-related data as well.
The average move for the Nasdaq-100 (NDX) on Non-Farm Payroll Friday in 2024 was +/-1.33%. Each individual reaction shows up on the graphic below.
The past couple reactions have been well below the average reaction of 1.33%, falling below 1%. Historically, when the more recent reactions have been outliers, like August and September below, the option premiums reflect that. Conversely, when reactions are below average, option premiums are lower.
Data Sources: Bloomberg & Author Calculations
The second graphic shows the NDX 1-Day at-the-money (ATM) premium on the close before NFP day and at settlement. The price is based on the midpoint of the bid-ask spread with the dark blue line representing the premium on the close the day before and lighter blue line the cash settlement value on the Friday close.
Data Sources: Bloomberg & Author Calculations
Following the ATM straddle overpricing the November reaction by more than 100 points, the December straddle premium was over 100 points lower than November. The result was option sellers realizing a loss, despite a much smaller than average reaction to the NFP report in December.
A buyer of the ATM straddle, on the close, the day before NFP who held the trade through the Friday close, would be up just under 550 points for 2024. The subsequent move exceeded the option premiums nine of twelve reports in 2024.
One other way to look at the ATM straddle is as a percentage of NDX. The final chart below shows this pricing for each report in 2024.
Data Sources: Bloomberg & Author Calculations
The straddle was priced at 0.65% of the level of NDX in December. This can be interpreted as the market not expecting even average volatility in reaction as the average price change for NDX in 2024 was +/-0.86%. The December straddle priced in a lower-than-average NFP move, but also a lower-than-average move for all trading days in 2024.
With this data, we now wait for late Thursday to see what the market is expecting this Friday. If the straddle is priced low, like last month, it could offer a chance to get long volatility (buying a straddle or strangle). A price below 0.90% of NDX would be attractive. Selling options would require a premium of at least 1.25% and this trade should be in the form of an iron butterfly or iron condor, to protect against losses if a move like this past August or September occurs on Friday.
