This week, we have a couple of inflation numbers in the form of the Producer Price Index (PPI) and Consumer Price Index (CPI) before the equity market opens on Wednesday and Thursday. The attention focused on inflation has waned of late, but the strong employment number from last Friday may have people thinking a second bout of inflation is on the horizon. Macroeconomic numbers like PPI and CPI can impact the outlook for stocks and the composition of the Nasdaq-100 (NDX) includes many firms that are sensitive to inflation and the economic cycle. To prepare for this week’s release we take a historical look at PPI and CPI reactions over the past year including NDX option pricing before and after the releases.
Producer Price Index: Wednesday Before The Open
For NDX, the average change on PPI day has been +/-1.00%, which is lower than the average day over the last year (+/-1.08%). NDX has experienced some outlier moves recently, with a 1.73% gain in July and over a 2% move back in April.
The straddle pricing for NDX has underpriced the subsequent price move half the time and overpriced the other half of observations.
Consumer Price Index: Thursday Before The Open
The average price change for NDX in reaction to the CPI announcement is +/-1.58%, but that figure is skewed higher by the price change in November 2022. Also interesting is the number of green bars on the chart below.
As the price changes have been muted, the straddle pricing has followed suit. The last two straddles anticipated very small moves and that prediction paid off for sellers of volatility into the CPI numbers. The small price changes on the last two CPI days resulted in nice profits for options sellers, despite the lower premiums taken in by sellers.
Of course, there is no telling what the market will expect going into these two numbers. However, after the reaction from the employment number, it is possible traders will be positioning for an upside surprise for both numbers. An upside surprise for inflation would be taken negatively by the stock market so we will be on the lookout for any NDX trades late Tuesday or Wednesday that appear to be based on an outlook for PPI and CPI.
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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