Ever since the launch of daily index options, the market has been fixated on the behavior and uses of options with only a day left to expiration. One of my big areas of focus is the option pricing before and after known unknowns like CPI or FOMC announcements. The thought process behind this is like the mentality behind trading equity options around an earnings announcement. The big difference is, regardless of the day, traders will be out of the trade at the end of the reaction day, either through cash settlement or exiting their position.
The chart below shows the 1-day price change for the Nasdaq-100 (NDX) for the last twelve reports. Note the average move is +/-2.01%. Also, note that the last time this figure was exceeded was in March of 2023. This is a function of inflation becoming less of a concern for the equity market as higher interest rates appear to be putting downward pressure on the CPI.
Before moving on to the at-the-money (ATM) straddle pricing, there are some other figures to discuss that are not on the chart above. First, the average price change for NDX in 2023 on CPI Day is +/-0.97%, which compares to +/-0.95% over all days in 2023. Last year was a year that CPI and inflation got a lot more attention out of the market and the average NDX move on CPI Day was +/-2.51%, higher than the +/-1.64% across all days in 2022.
A second look at NDX price action on CPI Day compares the 1-Day ATM straddle that expires the day of the report. The pricing of each straddle is based on the previous day’s close and the final settlement on CPI Day.
Note the ATM straddle premiums are lower for recent reports than the pricing in late 2022. This is a direct reflection of the smaller price reactions across both CPI Days and all trading days in 2023. There is an interesting pattern going back to March 2023, where every other month the straddle underpriced the CPI Day move (March, May, July) and then over pricing the move in April, June, and last month in August.
One idea around trading the numbers with NDX index options expiring is based on a bigger move than the straddle. The specific trade would be an inverse Iron Butterfly, buying the ATM straddle and selling the out of the money call and put to lower the cost of the trade. Last month, the ATM straddle was priced at 1.2% of NDX. Based on NDX pricing mid-day on Monday of 15360, a trade would consist of buying the 15360 call and put, then selling the 15180 put and 15540 call. The maximum value at expiration for this spread is 180, based on this maximum value, trying to pay under 100 for the spread would be a logical price point to start.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Russell Rhoads, PhD, CFA
Russell Rhoads, Phd, CFA is a highly regarded strategist, educator, and consultant – among other things he is perhaps best known as the author of Trading VIX Derivatives, the textbook in the space.
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