Over the past year and a half or so the investing world, along with anyone who buys anything, has been concerned with inflation. The monthly Consumer Price Index (CPI) is one of the widely followed inflation measures and the April reading will be released before the standard stock market opening this coming Wednesday May 10.
Technology stocks are very sensitive to inflation and interest rates, so the Nasdaq-100 (NDX) price action has been of particular interest to traders. We now have daily option expirations for NDX options which means not only do we have a way to read the mind of the market on a daily basis, but we can also speculate on an outlook based on a single day.
We compiled NDX price reaction data over the past 12 CPI releases and start with the actual one day price change for each of those releases.
The average price move on CPI day is just a bit over 2.5%, but notice the last time that level was exceeded was in November 2022 when NDX rallied almost 7.5% in reaction to the CPI reading. Since that large outlier, the CPI reactions have been relatively tame. This shows up in the 1-day straddle pricing as well.
The most expensive straddle, as a percent of NDX, was for the release on December 13, 2022. The big November move was fresh in trader’s minds, so option sellers demanded a premium. However, the December reaction was a gain of just over 1% resulted in those brave enough to sell options in front of the numbers realizing a solid profit. Do note, the NDX 1-day straddle pricing above trends lower from release to release. The final chart below shows how a straddle seller would fare for each CPI release going back to May.
Ever since the November release, straddle sellers have done relatively well, despite the straddle premiums trending lower. That leaves us with the upcoming release. It will be interesting to see what is priced in and what the subsequent reaction is to CPI. Our thinking is pricing below 1.3%, last month’s level, may offer a long opportunity, but time will tell.
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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