Will Nasdaq-100 (NDX) FOMC Overpricing Streak Extend to Seven this Week?

The upcoming FOMC decision is anticipated to have heightened market impact given a recent lack of other major economic data. While historical data shows FOMC days are slightly more volatile for the Nasdaq-100 (NDX) than average trading days, NDX reactions in 2025 have been notably subdued, averaging only +/-0.38% compared to a +/-0.99% average for all trading days in 2025. This current low volatility could lead to attractive, lower-priced straddle premiums before the announcement, presenting a potential opportunity for options traders speculating on an overdue significant NDX move, despite straddles purchased on FOMC days in 2025 having been unprofitable thus far.

Analysis

The upcoming FOMC rate decision is poised for heightened market attention given the recent scarcity of other significant economic data. Historically, FOMC days exhibit slightly elevated volatility for the Nasdaq-100 (NDX), with an average price change of +/-1.08% over the last twelve meetings, compared to +/-0.94% on average trading days. However, NDX reactions to FOMC announcements in 2025 have been notably subdued, averaging only +/-0.38%, significantly below the +/-0.99% average for all trading days this year. This suggests a potential for a larger-than-expected reaction.

This observed lack of volatility in 2025 FOMC reactions suggests potential for lower premiums on options, particularly straddles, ahead of Wednesday's announcement. The Net Short P/L has shifted positively to 47.37 points from a prior loss exceeding 300 points, indicating a change in market positioning or sentiment. The December 2024 meeting demonstrated a significant underpricing of the subsequent move, with a straddle priced at 187.40 settling at 790.69, highlighting the potential for mispriced volatility.

Despite the potential for attractive pricing, straddles purchased on FOMC days in 2025 have been unprofitable in all six instances, indicating a challenging environment for such strategies. This presents a dilemma for traders contemplating whether the NDX is overdue for a substantial move, potentially offering a speculative opportunity through late Tuesday option pricing. The mixed sentiment and speculative tone surrounding this event underscore the inherent uncertainty and risk.

Key Decisions for Investors

• Monitor FOMC commentary closely for any shifts in monetary policy guidance, as this could be the catalyst for a significant NDX move given current low volatility.
• Evaluate the risk/reward of purchasing straddles ahead of the FOMC announcement, acknowledging the historical underpricing potential but also the 0-for-6 track record of such trades in 2025.
• Consider hedging existing NDX positions or initiating speculative volatility plays if late Tuesday option premiums appear unusually cheap, but be mindful of the speculative nature and recent unprofitability of such strategies.