Recent history has the Nasdaq-100 (NDX) moving higher or lower by an average of 1.75% over the last twelve Non-Farm Payroll releases, commonly referred to as the employment report. The average price change for NDX over all days covering this period is +/-1.00%. Despite the market being aware of extra volatility in reaction to the employment report, option premiums have still been low relative to the subsequent price change. Of the last twelve, an at-the-money (ATM) NDX straddle priced the day before the report that expires the day of the report has underpriced the subsequent move nine of twelve reports. Finally, a consistent ATM straddle seller on employment day would be down almost 1,200 points, hopefully having given up that approach before it reached that point.
Data Sources: Bloomberg & Author Calculations
The next figure shows the price changes for the last twelve reports. Note, the last report resulted in a drop of almost 2%, slightly outside the average move. Despite not exceeding the average move by only 21 basis points, the straddle was very cheap.
Data Sources: Bloomberg & Author Calculations
This final graphic, showing the ATM straddle price the day before and at settlement shows how badly last month’s report was underpriced. The Aug 1 ATM straddle closed at 236.00 the day before the report. Based on the 1.96% drop in the NDX that day, the straddle was valued at 459.69 at settlement. Almost two times the previous day’s value.
Data Sources: Bloomberg & Author Calculations
There were several NDX trades to explore, but one that stood out the day before was a buyer of the NDX Aug 1 23300 Puts for 131.05 who sold the 23390 Puts for 126.15, resulting in a cost of 4.90. This trade was executed with the NDX at 23,264.50. This bear put spread was profitable as NDX finished August 1 at 22,763.31 placing both options deep in the money. The payoff for this trade, if held through the closing on August 1, appears below.
Data Sources: Bloomberg & Author Calculations
One of the most attractive things about this bearish trade is that if the market is unchanged or even slightly higher in reaction to the employment report, this trade still makes the maximum profit of 5.10. Of course, this trade worked quite well and was likely held through the close resulting in cash settlement of 10.00 and a profit of 5.10.
One trader used Nasdaq-100 Micro Index (XND) options to profit from last month’s 1.96% drop in response to the weak non-farm payrolls number. The afternoon before with about an hour left in the trading day, a trader purchased 5 of the XND Aug 1 233 Puts for 1.50 each. The payoff based on holding the position through the close (which they did) appears below.
Data Sources: Bloomberg & Author Calculations
The 233 put was 5.37 in the money at the close, resulting in a cash settlement of that amount for the holder of the put. Based on the change in open interest, it appears they held this through the close, so the profit for this trade was 3.87 when the initial cost of 1.50 is subtracted. We may be keeping an eye on the XND arena this Thursday to see if any smaller traders have an opinion about the market’s reaction the employment report.
