Short Dated Nasdaq-100 (NDX) Option Activity Around Non-Farm Payrolls – Will Last Month’s Negative Response from Stocks Repeat Itself This Friday?

The media likes to tell us that the upcoming election is the most important in a generation. These type of clickbait statements can numb us to what is important and what is not worth losing sleep over. After last month’s 2.38% drop for the Nasdaq-100 (NDX) in reaction to the Non-Farm Payroll report which was followed by even more weakness the following Monday (NDX down 2.96%) I think we can say all eyes will be on the tape Friday morning for the August payroll report. It is not just clickbait, this one matters. 

As noted, last month the reaction was a drop of 2.38%. The graph below shows the one-day price change for NDX on the last twelve payroll report days. Last month’s drop was by far the weakest reaction over the past 12 months and first time NDX lost 2% on payroll day since the September report in early October of 2022. That reaction was a loss of 3.88%, which was one of three times since 2020 that NDX lost 2% or more on payroll day. The other two big losses were in October 2020 and June 2022.

Data Sources: BigCharts.com & Author Calculations

Each of those three prior instances where NDX lost over 2% were followed by positive reactions the following month. The November 2020 report, following October 2020, saw NDX rise 0.11% and after the June 2022 drop NDX rose 0.14%. Finally, in November 2022 NDX gained 1.56% following the 3.88% loss the previous month. More directly, each of the last three big NDX losses were followed by positive reactions the following month.

Option premiums will fluctuate based on how risky traders consider a known unknown like a major economic report or earnings announcement. The next graphic shows the pricing of the NDX 1-day at-the-money (ATM) straddle before and after each of the last twelve payroll reports.

Data Sources: BigCharts.com & Author Calculations

The dark line on the chart represents the NDX ATM 1-day Straddle premium using the midpoint of the bid/ask spread. There are several instances of the straddle underpricing the subsequent move. Of the eight reports in the books for 2024, all but two (January and June) resulted in the price change exceeding the straddle pricing. Last month’s ATM straddle pricing of 325.25 was much higher than all other observations above, but still not enough to overcome the 2.38% drop in NDX.

Come Thursday afternoon, we expect NDX option premiums for contracts expiring on the close Friday to price in higher volatility expectations than most trading days and even the average payroll day. Our last employment report was a volatile one that had one pundit calling for an emergency rate cut, which still has us shaking our heads. The next FOMC meeting is on September 18, and the monthly payroll number is a major economic indicator for growth and inflation.

If the premiums are elevated, traders with a directional outlook will likely need to consider spreads based on their outlook. Traders considering a neutral trade may be pleased by what the market is offering in the form of elevated option premiums. Based on history we are leaning toward a bullish to neutral spread, likely selling an ATM NDX put and buying an out-of-the-money put, both of which expire the following day.