NDX Options Frequently Underpricing Recent Non-Farm Payroll Reactions

One of the most significant economic numbers released monthly is the Non-Farm Payroll report from the Bureau of Labor Statistics. The report contains data that can be applied to both growth and inflation outlooks, both of which are debatable in the current environment. Another significance around the report is it is usually the first look at the previous month’s economic activity among the numerous monthly economic figures. Finally, the significance for this report is it covers the first full calendar month of the current administration.

Based on the last twelve reports, the average one-day change for NDX on employment Friday is +/-1.35%. This is much higher than the average one-day change of +/-0.89% for all days over the same period. Despite most price changes being greater than +/-1.00%, last quarter’s move was a bit less than average at +0.74%. That combined with the ATM straddle pricing much higher than average, resulted in the best profit for NDX option sellers over the past year on payroll day. A summary of NDX price reactions and straddle statistics appears below. 

Data Sources: Barchart & Author Calculations

Note that of the last twelve NFP reports, the ATM straddle overpriced to move only 25% of the time or three of twelve reports. The net results for those selling the ATM straddle on the close on Thursday and holding it through the market close Friday is a cumulative loss of 360 points. As the title of the article states, NDX options have been underpricing the subsequent moves lately.   The next chart shows the price changes for each of the last twelve NFP reports.

Data Sources: Barchart & Author Calculations

The chart below shows the premium for the ATM straddle on the close the day before and on NFP day close. To get a head of a common question, the mid-point of the bid-ask spread is used for the straddle pricing. When the light blue line is higher than the dark blue one, option sellers had a difficult day. As noted, that is the case for most of the recent reports.

Data Sources: Barchart & Author Calculations

Before last month, the last time NDX overpriced the NFP report was November last year, with the straddle priced at 247.70 and settlement value coming in at 143.14. Note, the August and September moves were well outside the normal move, but the straddle pricing was high in front of the report. Sometimes expensive straddles are not expensive enough.

Thursday afternoon we will be checking in on NDX premiums and will lean to the long side if the pricing is reasonable. Current volatility expectations are high based on a multitude of factors so a long opportunity may not arise, but if the ATM straddle is price below the average, we may look to buy a straddle or if the straddle is a bit expensive buy the straddle and sell some out of the money options to reduce the cost.