Abstract Tech

NDX Option History Around FOMC Announcements

Russell Rhoads
Russell Rhoads, PhD, CFA Associate Clinical Professor of Financial Management at the Kelley School of Business at Indiana University

On Wednesday June 12 we get the latest rate decision from the FOMC which is widely expected to leave the fed funds target rate between 5.25% and 5.50%. This should be no shock to anyone, however there is always more to the FOMC announcement than just the new target rate. The big question these days is not if but when will we get our first rate cut, a date that continues to get pushed out to later this year. Just a few weeks ago, the financial market pricing had a 60% chance of the first cut coming at the June 12 meeting. That figure is now at 1.2%. Based on pricing early on June 11 the odds are for only one cut this year, likely coming in November or December.

Technology stocks, which make up a large portion of the Nasdaq-100 (NDX) are particularly sensitive to monetary policy. The figure below shows the average price move for NDX on the last twelve FOMC dates.

Data Sources: Bloomberg & Author Calculations

Based on the last twelve meetings, the average move on FOMC day is +/-1.20%. Do note five of the last six FOMC days resulted in NDX moving more than 1.20%. This also shows up in the figure below which shows the premium for a 1-day at-the-money (ATM) straddle on the close before and after FOMC day.

Data Sources: Bloomberg & Author Calculations

The last FOMC meeting concluded on May 1, 2024, and the ATM straddle overpriced the reaction by about 80 points. However, for the previous five FOMC announcements the straddle underpriced the subsequent move, which would be disastrous for option sellers. Finally, over the last twelve reports the straddle overpriced the move six times and underpriced the move six times. Basically, history tells us it is a coin toss as to the reaction.

Wednesday afternoon will give us more insight into what the Fed is thinking about economic activity and inflationary pressures. The market’s reaction is anyone’s guess, but we will be looking at the straddle premium late Tuesday using Wednesday options and ATM straddle pricing under 1.00% may lead us to get long with pricing over 1.50% of the NDX may lead us to a short trade. 

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