Russell Rhoads, PhD, CFA
Associate Clinical Professor of Financial Management at the Kelley School of Business at Indiana University
There are a few economic releases that may be thought of in the same manner for the Nasdaq-100 (NDX) as earnings announcements are for individual stock options. This coming week we get two of those items with the latest FOMC announcement coming Wednesday afternoon and the July Non-Farm Payroll (NFP) report before the stock market opens on Friday.
FOMC Wednesday
As of Friday July 25, the derivatives market is pricing in a 2.6% chance for a rate cut this Wednesday. The chance for a cut at the following meeting on September 19 stands at 63.9%. That figure is worth keeping an eye on along with the language that comes out of the meeting hinting at what may happen rate wise in September.
The last FOMC report was on June 18 and NDX managed a gain of 0.61 points or +0.0028%. This explains +0.00% highlighted in green in the summary table below which covers the last twelve FOMC announcement reactions.
Sources: Barchart.com and Author Calculations
The average NDX change on FOMC day is +/-1.30%, 30 basis points higher than the average move for all days over the same period of +/-1.00%. The 1-day at-the-money (ATM) straddle has overpriced the FOMC day price change 50% of observations. The net result, if a trader sells the 1-day ATM straddle the day before the FOMC announcement and holds it through the close, is a loss of just under 407.00 points.
The next graphic shows each of the last twelve NDX price changes on FOMC day. The last outlier price move, defined as a price change greater than the average move, was in December 2024 with a drop of 3.59%. That and the rise of 3.01% in July 2024 are why the net result is a substantial loss for straddle sellers on FOMC day.
Sources: Barchart.com and Author Calculations
The final graphic related to FOMC day shows the ATM straddle premium the day before and on the close of FOMC day. Note a loss of over 600 points (187.40 before, 790.69 after) on the December 2024 result and over 250 points (306.95 before, 562.43 after) on the July 2024 meeting day. Both are reminders to protect yourself against a large move when initiating neutral option spreads.
Sources: Barchart.com and Author Calculations
Checking in on the last FOMC report day, there were a couple of sizable and profitable NDX trades option trades of note. The first trade was executed just minutes into the open on FOMC day, with NDX at 21730. The trade sold 100 NDX Jun 18th 21970 Calls for 8.05 and purchased the 22010 Calls for 5.05 taking in a credit of 3.00. The payoff diagram below shows the result for this bear call spread.
Sources: Barchart.com and Author Calculations
NDX closed just under 21720 or just ten points lower than where NDX was quoted when the trade was executed. Based on volume in both contracts after the spread was executed, it appears this trade was held through the close resulting in a profit of 3.00 per spread. The short strike of this bear call spread is 21970, 1.16% higher than the previous close. Finally, the worst case scenario involves rising to the long strike of 22010, or 1.34% on the day, which results in the maximum loss of 37.00 points.
Another profitable trade was executed later in the day with NDX at 21801. This was also a bear call spread selling 100 Jun 18th 22180 Calls for 1.65 and buying 100 Jun 18th 22280 Calls for 0.80 resulting in a credit of 0.85. Worth noting, this trade was executed about an hour before the FOMC announcement.
Sources: Barchart.com and Author Calculations
This trade was profitable, but the dollar risk reward is not for the faint of heart. A move of over 2.58% on the day would result in a loss of 99.15 points per spread. Recall there are two FOMC days when the market adjusted by over 3% with one being to the upside. An unexpected bullish reaction would have been disastrous for this trade.
Non-Farm Payrolls Friday
The NFP report is a first look at economic activity from the previous month. This alone is why the market hangs on this economic release. Not only is there data in the NFP report regarding growth, but wage data could indicate whether inflation is continuing to lurk around. The NFP report covers both Fed mandates, maximum employment and moderate inflation.
The average move for NDX over the past twelve reports is +/-1.79%. That figure is 69 basis points higher than the average daily move of +/-1.10% over the same period. Last month the market rose 0.99%, which turned out to be more than expected by option traders. The straddle has overpriced the subsequent price change only three of the last twelve reports, or 25% of the time. Note a straddle seller would have cumulative losses on NFP day of 1094.54 points.
Sources: Barchart.com and Author Calculations
A big portion of the substantial loss for straddle sellers occurred in April. NFP was announced the same week as President Trump announced the initial tariff plan so that number is skewed by non-NFP news.
Sources: Barchart.com and Author Calculations
The straddle pricing chart below is interesting as the June straddle was priced at 238.60 the day before NFP and settled at 211.79. The most recent result priced the straddle at 146.61 with straddle valued at 226.97 at settlement. Both the June and July reactions were a gain of 0.99%, but straddle sellers only made a profit in June.
Sources: Barchart.com and Author Calculations
There was one trade, using Nasdaq-100 Micro Index (XND) options that mistakenly expected a muted response to the last NFP report. Late on July 2, with XND at 226.15, a trader sold 100 of the XND Jul 3rd 225 Puts for 0.41 and 100 of the XND Jul 3rd 227 Calls for 0.47, taking in a credit of 0.88. This short strangle’s payoff on the July 3 market close appears below.
Sources: Barchart.com and Author Calculations
XND finished the day at 226.42, so the upside break even on this short strangle is only 0.64%. To the downside, there is a cushion of just over 1%. Note XND finished the day at 228.67, placing the short 227 call option 1.67 in the money. However, we came across a buyer of 100 XND Jul 3rd Calls who paid 0.85. There is a high likelihood that this was the strangle seller covering their short call as the market moved higher. The net result is a gain of 0.03, not including commissions. This is a great example of managing a trading and exiting when the trade is not going according to plan.
Russell Rhoads, PhD, CFA
Associate Clinical Professor of Financial Management at the Kelley School of Business at Indiana University
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