Nasdaq-100 Straddle Buyers Have Loved Non-Farm Payrolls; Will the Trend Continue?

The monthly Non-Farm Payroll release is the first look at economic activity during the previous month. This figure is a key indicator with respect to both economic growth and potential inflation, both figures that have the market’s attention these days. The Nasdaq-100 (NDX) is the most economically sensitive of the major indices due to a high weighting of technology stocks. This results in Non-Farm Payrolls causing larger moves, both higher and lower, for NDX on payroll Friday than on other trading days.

The graphic below shows NDX price changes for the last twelve reports. The average move has been +/-1.45%, much lower than the average of +/-0.88% for all days over the same period. Of the last twelve reports, only two have had a price change lower than the average for all trading days. Whatever way you want to measure it payroll Friday is a volatile day for the equity markets.

Data Source: Barchart.Com

NDX option pricing adjusts higher in front of payroll Friday. Despite pricing in higher risk, the 1-Day at-the-money (ATM) NDX straddle has underpriced ten of the last twelve reports. The graphic below shows the 1-Day ATM straddle pricing on the close the day before the payroll report and the settlement value on the close.

Data Source: Bloomberg

The straddle underpriced all but two of the most recent payroll reports which means straddle buyers would benefit from one day price action. A consistent straddle buyer would realize cumulative profits of about 750 points buying and holding the straddle through the close. Of course, the big question is how will this Friday’s report will impact option premiums and will NDX keep up the pattern of outlier price changes in response to the employment report.