Thursday morning brings us the latest CPI report which will be the last big economic report focusing on inflation before next week’s FOMC meeting. Recent weak numbers place the odds of a single cut at next week’s meeting at over 100% with a slight chance of a 50 bp cut being priced into the derivatives markets. also, the market is now looking for three cuts, one at each meeting, between now and the end of 2025. Any change to those figures would be reflected in equity prices as well.
CPI day has been more volatile than average day for the Nasdaq-100 (NDX) by 30 basis points at +/-1.29% versus an average price change of +/-0.99% across all days over the past 12 months. Last month the move was in line with the average, gaining 1.33%. Option sellers take note of the short P/L below which indicates the performance if a trader consistently sells the at-the-money (ATM) straddle that expires on CPI-day on the market close the day before the report. Despite the win percentage being a coin toss (50/50), option sellers would be down just over 300 points.
Data Sources: Bloomberg & Author Calculations
The average move is skewed a bit due to NDX dropping over 4%. However, the timing of that move was during the early phases of tariff announcements. Any outlier move (greater than the average) has been to the upside except for April.
Data Sources: Bloomberg & Author Calculations
Straddle premiums have varied greatly with last month’s 1.33% gain was greatly underpriced by the options. The ATM straddle was priced in a move of +/-0.83% which is even less than the average move on all trading days. The previous two reactions likely put pressure on premiums as a minor reaction to CPI was expected.
Data Sources: Bloomberg & Author Calculations
There was one trader using NDX options that managed to pick the right direction for last month’s market reaction. Late in the day on the 11th a trader sold the NDX Aug 12th 23480 Puts for 91.25 and purchased the NDX Aug 12th 23470 Puts for 87.45 resulting in a credit of 3.80. This trade was executed with NDX around 23,525.
This trade worked out well as the put spread strikes were well below the close resulting in a profit of 3.80 for this bullish spread. also note that there is a little cushion to the downside (0.19%) so despite this trade being bullish in nature, a small loss on the day would have also resulted in a full profit of 3.80 for this trade.
