NDX Volatility Expectations Underpricing FOMC Reactions

The FOMC announcement this coming Wednesday may not be getting the attention it normally does as there seems to be so much more going on in the world. However, the Fed will announce no change to the target rate (I’m 99.2% sure of this). Much of the focus will be on the statement and how financial market projections regarding the next cut will adjust. Currently, the outlook is for the next cut to occur at either the June or July meeting with only two cuts priced by the market for the balance of 2025.

The Nasdaq-100 (NDX) is composed mostly of economically sensitive stocks and the index has responded to FOMC announcements will higher average volatility than on non-FOMC trading days. The table below summarizes NDX and NDX option pricing around FOMC the last 12 FOMC announcements.

Data Sources: Bloomberg / Author Calculations

The average price change for NDX on FOMC days has been up or down 1.54%. This figure is 65 basis points higher than the average price change for NDX on all days of +/-0.89%. Do note the last announcement resulted in a very small price change of (0.24%) which may stick in traders’ minds, creating a buying opportunity late Tuesday using Wednesday NDX options. The following graphic shows NDX performance around the last 12 FOMC announcements where the recent reaction stands out.

Data Sources: Bloomberg / Author Calculations

The 1-Day NDX at-the-money (ATM) straddle, priced on the close the day before the FOMC announcement and on the close the day of the announcement, overpriced the subsequent reaction only 3 of the last 12 reports. This indicates that option buyers have done well on FOMC day. Paper profits for a 1-Day NDX ATM straddle buyer over the last 12 FOMC reports result in a profit of well over 1,000 points. The graphic below shows the 1-Day NDX ATM straddle pricing before and after FOMC day.

Data Sources: Bloomberg / Author Calculations

The dark blue line represents the price before and the light blue line the settlement value of the ATM straddle. Note the December 2024 report resulted in a move 600 points more than the straddle price. Also, note the most recent premium was slightly elevated on the heels of two outlier moves. Typically, the straddle pricing is influenced by more recent price action which leads us to this the straddle may be relatively cheap late Tuesday for a long volatility opportunity into the announcement.