How SPX And NDX React Around CPI And PPI Plus Option Earnings Histories For DAL, C, JPM, And WFC

Sunday Preview For Week Of October 9 - October 13

This week marks the beginning of earnings season with three banks and an airline reporting at the end of the week. In addition to those announcements, we have a couple of inflation numbers in the form of the Producer Price Index (PPI) and Consumer Price Index (CPI) before the equity market opens on Wednesday and Thursday.

Producer Price Index – Wednesday Before The Open

For major economic numbers we focus on the price change and the SPX and NDX 1-day at-the-money (ATM) straddle pricing for the S&P 500 (SPX) and Nasdaq-100 (NDX). Starting with SPX, the last twelve one day price reactions to PPI appear below.

The average price change on PPI for SPX is +/-0.75% which is slightly lower than the average SPX price change of +/-0.78% or all days over the last year. Another observation is there has not been a move of over 1% in either direction since April 2023. The market has become less concerned about inflation, and it shows up in the price action on PPI day.

SPX straddle pricing relative to the price change has been very erratic with the straddle overpricing the move 50% of the time and underpricing the move 50% of the time over the last twelve months.

For NDX, the average change on PPI day has been +/-1.00%, which is lower than the average day over the last year (+/-1.08%). NDX has experienced some outlier moves recently, with a 1.73% gain in July and over a 2% move back in April.

The straddle pricing for NDX has underpriced the subsequent price move half the time and overpriced the other half of observations.

Consumer Price Index – Thursday Before The Open

The SPX CPI reaction has been more dramatic than PPI with an average SPX move of +/-1.11%. However, note on the graphic below that the biggest moves on CPI day were almost a year ago. Recent price changes for SPX on CPI have been less than 1.00% with the last notable reaction in March this year.

The SPX straddle pricing on CPI day has exceeded the price move by 75% of observations over the last year. Note as the reactions have been very small that the SPX straddle price has trended lower.

The average price change for NDX in reaction to the CPI announcement is +/-1.58%, but that figure is skewed higher by the price change in November 2022.

As the price changes have been muted, the straddle pricing has followed suit. The last two straddles anticipated very small moves and that prediction paid off for sellers of volatility into the CPI numbers.

Earnings Next Week

We monitor trading in the fifty stocks that have the most active option volume and four of those firms report this week. Delta Airlines (DAL) reports Thursday before the market opens and is followed by three banks: Citigroup (C), JP Morgan (JPM), and Wells Fargo (WFC) which report Friday before the market opens. A summary table appears below and then individual stock information follows.

Delta Airlines – Thursday Before The Open

The average earnings reaction price change for DAL over the past twelve quarters is +/-3.11%. The past couple of quarters DAL’s price change has been much lower than the long-term average.

DAL straddle sellers into earnings have done quite well with all but two straddles overpricing the price change in reaction to earnings. Despite the consistent overpricing, the premiums remain elevated. For instance, last quarter the ATM straddle was priced at 2.06 and closed at 0.81 the following day.

Citigroup – Friday Before The Open

The average earnings price reaction for C is +/-3.88%, but that figure is skewed by an over 13% gain in reaction to Q2 2022 earnings.

A consistent C straddle seller would experience cumulative losses, but if they missed the 13% move in 2022, they would have a net profit.

JP Morgan – Friday Before The Open

We cannot recall another earnings reaction graphic as streaky as the one below. Note the stock has gained the last four earnings announcements after losing value for the previous eight. Last quarter was the quietest reaction to earnings in the last three years and when we see that we are on the lookout for underpriced options going into earnings.

The ATM straddle has been a disaster for two of the last twelve earnings announcements. However, despite those two big moves, straddle sellers would make a small profit in JPM over the past three years.

Wells Fargo – Friday Before The Open

Finally, WFC’s average price change is +/-3.09% around earnings and the reactions have been more volatile than the other two banks reporting Friday. Note the last two price reactions are well below the average move which, like JPM, may result in cheap options into earnings this week.

The straddle pricing has been trending lower over the past four reports, reflecting the tamer price reactions to earnings.