Market Insights

Inflation was slightly lower than expected last week, having a minor impact on trading. How could traders have reacted to the news?

This article compares two strategies designed to capture a positive response to Wednesday’s move. One uses options on the heavily traded Invesco QQQ Trust (QQQ), which tracks the Nasdaq-100 index. The other uses CME E-mini S&P 500 futures.

Lower inflation can lift both products because it reduces the need for high interest rates. QQQ and the Nasdaq-100 have typically benefited from lower borrowing costs, but recently have struggled as investors shift away from high-multiple growth stocks like Microsoft (MSFT) and Apple (AAPL).

E-mini S&P 500 futures, on the other hand, track a wider range of sectors. That’s helped the S&P 500 outperform slightly versus the Nasdaq-100.

QQQ Debit Spread

Debit spreads are a common and highly adaptable option strategy, potentially useful around important events like inflation reports.
Debit spreads are two-legged positions involving:

• The purchase of a call or put near the money. This can profit from a directional move in the underlying security. Calls can appreciate when prices rise and puts can gain value to the downside.
• The sale of a call or put further from the money. The resulting credit offsets part of the cost of the position, which lowers the overall cost.
  That lower net cost can result in a bigger percentage gain (leverage) from modest price moves.
• Debit spreads primarily profit from stocks rising or falling. Traders can go long or short before binary catalysts that could trigger sudden moves up or down.
• They are also called “vertical” spreads because they use different strike prices with the same expiration.

See this article for more on calls and puts. See this article for more on debit spreads.

QQQ opened at $627.27 last Tuesday after the Consumer Price Index (CPI). A trader might have targeted the weekly expiration, with contracts expiring this Friday, January 23.

Invesco QQQ Trust (QQQ), hourly chart, with January 13’s inflation report marked.

He or she could have purchased the 629 calls for about $5.48 and sold the 632 calls for about $4.20, translating into a cost of $1.28. The position could widen to $3 if QQQ ends this week at $632 or higher. (That’s a potential gain of 134 percent from the underlier moving about 0.8 percent.)

The trade would have been profitable for a short time because the Nasdaq-100 rallied after the inflation report and held its ground last Tuesday morning. However, QQQ lost its ground in the afternoon, and the position was worth about $0.66 on Friday.

The strategy isn’t profitable yet, but it only used a limited amount of capital. This is an example of how traders can use debit spreads to manage risk in uncertain markets.

E-Mini Futures

E-mini futures track the price of the S&P 500 index, the most actively traded stock-market index. Traders can go long to profit from rising prices and short positions can profit when the broader market declines. Futures trade virtually around the clock, letting customer orders get filled outside normal U.S. hours. (That contrasts with the QQQ spread cited above, which can only be transacted between 9:30 a.m. ET and 4 p.m. ET.)

CME’s E-mini S&P 500 futures track the S&P 500 with a value of $50 per point. A trader long one contract will see his or her account increase by $50 every 1 point the index rises. Conversely, they stand to lose $50 each point it declines.

E-mini S&P 500 futures trade in quarter points, which each have a value of $12.50.

The root symbol is ES. Futures also have expiration months (expressed with a unique letter) and years. The current contract expires in March.

“H” is the identifier for March, so its symbol is ESH26. (Natural born traders using TradeStation know “@ES” tracks previous contracts historically over time, giving continuous price data for years into the past.)

ESH26 traded for 7007 when the inflation report hit at 8:30 a.m. ET last Tuesday. It spiked to 7,036 immediately after the report, so a single long contract would have appreciated $950. However, the gains didn’t stick and ESH26 ended last week at 6,977. A single long contract would have closed down about $1,500. (See our margin requirements page for more.)

E-mini S&P 500 futures (ESH26), hourly chart, with January 13’s inflation report marked.

Options vs. Futures

Economic reports like CPI can trigger moves across various markets because the Federal Reserve may react by changing monetary policy. That was especially true in 2022 when the central bank sharply raised interest rates to combat post-pandemic price spikes.

Investors have recently focused on other catalysts because the Fed has already cut interest rates. One of their big concerns is the high valuation of many large-cap growth stocks following years of steady gains. Other worries include central bank independence and geopolitical risk.

Options on highly liquid ETFs like QQQ offer defined risk and relatively simple position sizing. The potential disadvantage is that they require the underlying index to move in the expected direction in a specific timeframe.

Futures, on the other hand, track price moves more directly. They also trade around the clock – including the premarket last week. While that flexibility can improve risk management, there can be greater risk, like potentially enduring losses beyond the initial margin.

Knowing these dynamics can help traders select the strategies most aligned with their views and expectations. That can be especially important around major events like inflation reports.

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