NDX History Around CPI Plus How a Couple Traders Approached Last Month’s Report

The article analyzes the Nasdaq-100's (NDX) price action around CPI reports, noting an average daily move of +/-1.36% on CPI release days, slightly higher than typical trading days. Despite this volatility, sellers of 1-day at-the-money straddles have incurred cumulative net losses over the past year, indicating that outlier moves have outweighed instances of profit. However, recent CPI reactions have been more subdued, allowing sophisticated traders to successfully employ defined-risk vertical spread strategies to capitalize on anticipated limited market movement or specific directional biases, highlighting opportunities for nuanced options plays around critical economic data releases that influence FOMC rate cut expectations.

Analysis

The market's sensitivity to the upcoming CPI report is heightened by its direct influence on FOMC policy, with current pricing indicating a greater than 60% probability of a rate cut at the September meeting. Historical analysis of the Nasdaq-100 (NDX) on the last twelve CPI release days reveals an average price move of +/-1.36%, only marginally higher than the +/-1.11% average on all trading days. This modest increase in average volatility masks significant tail risk, as evidenced by the performance of short-term options. Selling 1-day at-the-money (ATM) straddles has proven to be a net losing strategy, accumulating a loss of over 350 points despite being profitable on 50% of the occasions, indicating that outlier moves have more than offset the gains from periods of relative calm. In contrast, sophisticated traders have recently found success with defined-risk vertical spreads, executing both bullish and neutral-to-bearish positions that capitalized on specific outcomes, such as the muted reaction to the most recent CPI report. This suggests that while event-driven volatility is a key consideration, undefined-risk short volatility strategies are poorly compensated, whereas targeted, risk-capped structures offer a more viable approach to trading the event.

Key Decisions for Investors

• Investors should exercise caution when selling short-term, undefined-risk volatility on the NDX around the CPI release, as historical data shows that outlier price moves have resulted in net losses for strategies like ATM straddles.
• Consider employing defined-risk options strategies, such as vertical credit spreads, to express a specific directional or volatility-based view while capping maximum potential loss.
• Monitor the pricing of short-dated options for opportunities to capitalize on either an unexpectedly muted market reaction or a significant repricing of the over 60% probability of a September Fed rate cut.
• Given that most of the outsized historical reactions have been bullish, while the single largest outlier was bearish, positions should be structured to account for the potential of a sharp move in either direction.