They should have used the “Spoiler Alert” tag.
But that is a vague prediction, and it doesn’t mean we know how the market will react. So let’s look at some statistics about how the market has reacted on prior CPI Report days in order to get a better grip on our directional bias.
CPI Report Days in 2022: Stock Market Stats
Of the last six CPI Report days, the (^SPY) has opened lower 66% of the time (four out of six):
- February 10th (-1.4% — CPI: 7.5 vs 7.2 Fed consensus)
- March 10th (-1.1% — CPI: 7.9 vs 7.9 Fed consensus)
- May 11th (-0.02% — CPI: 8.3 vs 8.1 Fed consensus)
- June 10th (-1.66% — CPI: 8.6 vs 8.3 Fed consensus)
Notably, three of those four red opens were greater than 1% moves.
On the two occasions in 2022 where the CPI Report spawned a green open, the results were lackluster:
- January 12th (+0.6% — CPI: 7.0 vs 7.0 Fed consensus)
- April 12th (+0.71% — CPI: 8.5 vs 8.4 Fed consensus)
Average SPY open on a CPI Report Day in 2022: -0.478%
A look at the closing statistics show an even more grim picture: five out of the last six CPI Report days resulted in red closes in the SPY. The only green close was on January 12th — a nano-gain of 0.27%.
Of the last six CPI Report days, the S&P 500 has only closed higher than its opening price one time — March (-1.1% open → -0.45% close).
Average SPY close on a CPI Report Day in 2022: -0.875%
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Is this an article telling you to get bearish? Absolutely not. These are simply the statistics from 2022’s CPI Reports. It’s worth noting that of the six CPI Reports in 2022, all have been either in line with consensus estimates or negative inflationary surprises. That means 2022 has not yet seen a CPI Report in which the actual inflation number comes in below the consensus estimate — if it did, maybe these numbers would look a little less ominous.
And there are plenty of smart analysts out there who think that this time could be the time. After all, inflation doesn’t even need to fall to beat estimates. The Fed's consensus for June’s CPI (which is what tomorrow’s report will measure) is 8.8% — 0.2% higher than last month’s 8.6%. If core inflation only rises by a tenth of a percent — boom — there’s your first positive CPI surprise of 2022.
Now that the data’s in your hands, it’s time to make a decision: are you bullish, bearish, or neutral?
No matter what your directional bias is, we've got good news: there's an option strategy for that.
If the July 13th CPI Report has you feeling market-neutral…
You might consider a short iron condor. Short iron condors are one of the most popular market-neutral strategies. The short iron condor is a great choice if you’re feeling like the CPI is about to be a big nothingburger. (Side note: Today, this writer learned “nothingburger” is actually a real word in the real dictionary. English is a strange language.)
Aside from being a market-neutral strategy (meaning they work best when the stock stays put), short iron condors have two big potential benefits:
- They are positive theta — they gain value with the passing of time
- They are negative vega — they gain value as volatility decreases
With the VIX riding well above its mean average and currently indicating a daily move of more than 1.6%, that last part could be a particularly big benefit if you’re thinking that this Wednesday will look anything like January 12th (+0.6% open → +0.27% close) or April 12th (+0.71% open → -0.37% close).
So if you’re skeptical about the big move that the market has priced in, you could consider a short iron condor in SPY. To construct this trade, you’d likely want to use an expiration between next Friday (7/22) and the following Wednesday (7/27). That two-week to expiration zone is the “sweet spot” of theta decay, where time decay begins to ramp up.
Example construction of the short iron condor:
Let’s say you wanted to give yourself a 10% buffer and feel strongly that SPY will remain squarely between $400 and $365. If you’re seeking to risk roughly $400 for a maximum credit of $100, you could opt to sell an iron condor at the 360/365/400/405 strike, and the 7/22 expiration.
In other words, that would mean selling two credit spreads. In other-other words, that would mean selling two options that were closer-to-the-money (in this example, the $365 put and the $400 call) and buying two options that were further-from-the-money (in this example, the $360 put and the $405 call).
Of course, this is an example trade using numbers from Monday’s close. It’s just an idea! If you’re feeling neutral about the CPI Report, please do your own diligence, and select strikes that you feel comfortable with — bonus points if you use technical levels to do so!
If the July 13th CPI Report has you feeling bullish…
If you’re feeling like the analysts at J.P. Morgan and Morningstar are onto something, then you might be thinking Wednesday is the time to get bullish on the market. That said, if the market action on the prior six CPI Report days is any sign of what’s to come, it’s probably better for bulls to bet on capped gains than it is to swing for the fences. Remember: the two CPI Reports with green opens were both less than 1%, and they both closed lower than they opened.
So, if you were going to make a tempered bullish bet, you could consider deploying the credit spread! As stated above, volatility is relatively high right now, and when the S&P 500 rises, it typically sends the VIX lower — much like the short iron condor, your credit spreads will love this (remember, a short iron condor is just two credit spreads mashed together!).
To construct a bullish credit spread trade that benefits from a decline in volatility and isn’t asking for a big CPI-day SPY gain, you could simply use the bottom half of the short iron condor from above — the 365/360 put credit spread expiring on 7/22. To construct that, you would sell the more expensive $365 strike put, and buy the cheaper $360 strike put as downside protection. If SPY goes up, the cost of your credit spread goes down, giving you a chance to lock in some of that upfront credit! If SPY stays stagnant, that’s fine too! If by the expiration, SPY remains higher than your short put strike ($365, in this case), you win! The profit is all yours.
Just like the short iron condor above, this is an example trade. If you’re really bullish, you could pick up an at-the-money call debit spread instead! Or if you’re really, really bullish, you could just buy calls. But if we’re judging from the previous 2022 CPI Reports, it’s probably better for bulls to aim for base hits rather than home runs here.
If the July 13th CPI Report has you feeling bearish…
If you saw that White House tweet and thought, “okay, they’re warning us ahead of time, that’s a red flag” — then you’re probably already zipping up your bear suit. If so, you likely don’t need to get fancy with this one. A long put or a long put debit spread will offer plenty of bearish exposure. When markets fall, volatility often rises swiftly. Both the long put and the long put debit spread are positive vega — they benefit from a rise in volatility. The difference between the two is the level of bearishness.
If you’re expecting a dramatic, sharp move to the downside (akin to February 10th and June 10th’s market reaction), you could opt for the long put. Select a strike with a breakeven that you feel comfortable with, don’t go too far out-of-the-money, and don’t risk more than you’re comfortable with losing.
If you’re expecting a move that’s more mildly bearish (like March 10th or April 12th) then you might be better off with an at-the-money put debit spread that can benefit from even a soft move lower.
The Bottom Line: Do we have to say it again? These are NOT trade recommendations. No one knows what is going to happen on Wednesday. But by taking in all the data before you, including analyst projections, past market reactions, and the White House’s eerily foreshadowing press conference from Monday, you can make an educated prediction — and you can use options to bring that prediction to life.
