The monthly Non-Farm Payrolls (NFP) report is a first look into economic activity in the previous month. The importance of this number comes from insights into both growth and inflation buried below the headline number. Due to these factors, the equity markets pay close attention to the report and the subsequent market reaction to the data. We like to treat payroll Friday like an earnings announcement for the economy by focusing on the magnitude of the market reactions priced in by the at-the-money (ATM) straddle versus the subsequent move. With all that, here is the straddle history for Nasdaq-100 (NDX).
Quick note – the report that came out in early April 2021 and April 2023 was on a day that the equity markets were closed so there is no data point from those two months.
The average straddle price, as a percent of NDX, is 1.34%. May was the first time the ATM straddle was priced below this average since August 2022. This coincides with little debate as to what the FOMC actions would be over the next few months.
Turning to the actual price moves from NDX, the average price change on payroll Friday is a gain or loss of 1.22%. This figure is only 10 basis points lower than the average NFP straddle pricing. Note, all four of the NFP reactions in 2023 were outside the average price range.
So how did ATM straddle sellers fare on NFP day? That is probably the most important piece of information here. The final chart shows the price reaction relative to what the ATM straddle was pricing.
Despite some big moves out of NDX in reaction to the payroll report, straddle sellers profit more than lose. Also, the pattern above shows when there is a move that is 1% or more than straddle expectation, the following report results in a profit for straddle sellers.
Based on the historical pattern, where big outlier moves relative to straddle pricing are followed by price changes that fall within the straddle range, we think option sellers may have an edge into tomorrow’s report. Of course, this depends on the NDX ATM straddle pricing Thursday before the close, but we also think that may be elevated on the heels of the big move in response to last month’s report.
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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