NDX Traders Should Expect High Volatility Around Sep Non-Farm Payroll Report

The Bureau of Labor Statistics releases the Non-Farm Payroll (NFP) Report on Friday October 4 before the equity market open. As the markets do before the first Friday of each month, there is a level of anticipation around Friday’s figures and the subsequent market reaction. The title of this article states that traders should expect higher volatility this payroll Friday is a direct reference to the Nasdaq-100 (NDX) reaction to the last two NFP reports.

Data Sources: Bloomberg & Author Calculations

The chart above shows the 1-day price change for NDX on the last twelve NPF reports. The average price change is +/-1.37% across all reports which is 51 basis points higher than the average price change of +/-0.86% for NDX across all trading days. The higher average price change contributes to higher NDX option premiums in front of NFP day, but the last two reports should add a bit more ‘juice’ to premiums.

The next chart shows the price for the NDX 1-day at-the-money (ATM) straddle on the close the day before the NFP report and the day after. The price reaction for the last three NFP reports has exceeded the straddle pricing, with the last two doing so in a dramatic fashion.

Data Sources: Bloomberg & Author Calculations

As of writing this piece, the pricing for the Oct 4 ATM straddle on the close October 3 is unknown. However, recent losses for option sellers on NFP day will likely have option sellers a bit gun shy. That is unless they believe what they are getting paid to sell premium is worth the risk.

Despite the excessive NDX move last month, there was as neutral trade that realized a nice profit. The dollar risk versus dollar reward is a bit daunting, but the 1-day price change to put this trade as risk is excessive.

Late Thursday September 5, with NDX at 18912, a trader sold the NDX Sep 6 18140 Put for 2.41 and sold the Sep 6 19650 Call for 1.30. They completed an iron condor, going out 150 points in each direction to buy the 17990 Put for 1.55 and NDX Sep 6 19800 Call for 0.96. These transactions worked out to a credit of 1.20 and a payoff on the close that appears below.

Data Sources: Bloomberg & Author Calculations

In an academic sense, this trade is risking 148.80 to make 1.20. However, break even for this trade occurred 4.09% lower or 3.90% higher from where NDX was quoted when the trade was executed. A drop of 4.83% or move of 4.70% to the upside is needed to reach the maximum loss for this trade. Since this is in the past, we know the outcome for this trade was the maximum profit of 1.20 per spread.