Checking in On 1-Day NDX Straddle Price Behavior

Short dated or daily index options have taken the world by storm. Nasdaq-100 (NDX) index options are one of just a handful of markets with daily expirations. The process behind rolling out daily NDX options was completed in 2022 and we have focused on the price behavior of at-the-money (ATM) NDX straddles, even before expirations were available for trading. Admittedly, 2022 and 2023 (through September) are two very different market environments. Also, the price behavior of short-dated index options in 2022 and for the first nine months of 2023 are also quite a contrast.

Methods

For each PM NDX expiration from January 2, 2022, through September 30, 2023, the at-the-money straddle is priced using the mid-point of the bid ask spreads for both the put and call. The straddle is then priced at expiration using the closing NDX level for that day. For hypothetical trading results a commission of $1 per contract and giving up $1 (0.10 times the contract multiplier of $100) relative to the mid-point of the spread is taken into consideration. For example, if the mid-point of the straddle is 50.00, a seller would net 48.00 points and the spread would cost a buyer 52.00. This accounts for slippage and commissions, but also means that the reported long and short performance is not reciprocal.

Straddles were priced covering one-day periods for each PM expiration. The results were calculated for 2022, the first nine months of 2023, and finally for the full period January 2022 through September 2023.

The profit and loss associated with buying and selling straddles, then holding the position through expiration is tracked. Other data points include the number of observations where the straddle was priced higher than the subsequent move, the straddle price divided by the closing index and the percent price move for the NDX over the life of the straddle.

Trading Example

NDX closed at 14441.51 on June 1, 2023. The closest strike to this price is 14440, so the NDX Jun 2^nd 14440 Put and NDX Jun 2^nd 14440 Call are the options used to price a 1-day ATM straddle. The mid-point of the bid ask spread for the 14440 Put is 82.85 and the 14440 Call 59.70. The result is a mid-point price for the NDX Jun 2^nd Straddle of 142.55.

The following day NDX closed at 14546.64, which places the 14440 Call 106.64 in the money. The 14440 Put will expire out of the money. A seller of the straddle would be debited 106.64 and the buyer would receive 106.64. This figure is 35.91 below the value of the straddle so a buyer of the straddle loses 35.91 and the straddle seller profits by this figure. Finally, both the buy and sell results are adjusted lower by $2, accounting for $1 in commissions and $1 for slippage. The result here is the buyer loses 37.91 and the seller gains 33.91.

2022 Price Behavior

In 2022, the performance of a 1-day short straddle falls outside the expectation that sellers of options profit over time with periodic setbacks. Over a long period of time, option sellers typically perform better than option buyers. However, this is not the case with a consistent seller of 1-day ATM NDX straddles in 2022. Table 1 shows the performance of a 1-day straddle for both a buyer and seller based on the previously described methods. 

Table 1: 1-DAY NDX ATM Straddle Performance In 2022

Data Sources: Bloomberg And Author Calculations

There are fewer observations for Tuesday and Thursday as those expirations were launched in 2022. Also, there is not a PM settled Friday contract on the 3^rd Friday of each month. The 3^rd Friday is the traditional expiration date from the early days of listed option trading and NDX options that expire those days do so on the market open.

In 2022, Monday and Tuesday were the only days that profited from consistently selling an ATM straddle on the close the day before expiration and holding through the close on expiration day. The other three days are consistent losers for option sellers. Monday is also the day with the smallest average price move of 1.40% and Tuesday is a close second at 1.41%. These figures are much lower than the average straddle price, as a percentage of the NDX close of 1.52%. Average straddle pricing is highest on Wednesdays and Fridays, which are both days that periodically have significant economic announcements. For example, most Federal Open Market Committee (FOMC) announcements are on Wednesdays and the monthly Non-Farm Payroll (NFP) report comes out on Friday.

Thursdays are also poor days for straddle sellers, but there are very few observations due to Thursday options not being available until August 2022. The average move on Thursdays is higher than all days except Friday at 1.74%. Remember NDX performance is dominated by a few large firms and several of those firms report earnings with the initial market reaction coming on a Thursday.

Performance for a hypothetical straddle seller and buyer show up in Figure 1. Any trader or portfolio manager would be very pleased with the long straddle performance shown below. Of course, if a trader were blindly selling straddles, the performance depicted below would likely result in the strategy being abandoned.

Figure 1: 1-DAY NDX ATM Straddle Performance In 2022

Data Sources: Bloomberg And Author Calculations

For the first three months of 2022, both the long and short straddle performance oscillated between profitable and a loss. On April 1, the performance began to diverge and straddle buyers benefitted from consistent underpricing of 1-day ATM options. In December 2022, a straddle seller would profit while the buyer would realize a loss. The December results continued into 2023 with straddle sellers doing better than buyers.

First Nine Months 2023 Price Behavior

For the first nine months of 2023, the average one-day price change for NDX was +/-0.99%, much lower than the average one-day price change in 2022 of +/-1.64%. The 1.64% figure is slightly different than the result in Table 1 as it represents all days, not just days with 1-day options expiring on the close. The average straddle price in the first nine months of 2023 was 1.00%, slightly higher than the average price move, but much lower than the average straddle premium in 2022. These figures and more appear in Table 2. 

Table 2: 1-DAY NDX ATM Straddle Performance For January 2023 – September 2023

Data Sources: Bloomberg And Author Calculations

The Monday performance is superior to any of the other days, while Thursday is a day that straddle sellers suffered losses. Monday is the least volatile day of the week for the first nine months of 2023 with an average move of +/-0.69% versus the average straddle pricing of 0.93%. Again, Thursday is a day where the shares of many large members of NDX report earnings. Note the average price change on a Thursday is +/-1.27%, the only day of the week where the average change for NDX is higher than 1%.

In 2022, performance for 1-day straddle buyers and sellers trended higher and lower respectively. In the first nine months of 2023, this performance has been mixed with periodic setbacks for both approaches. The short performance is positive, but at +251 points it could be wiped out in a couple of days where the options underprice the subsequent move.

Figure 2: 1-DAY NDX ATM Straddle Performance For January 2023 – September 2023

Data Sources: Bloomberg And Author Calculations

2022 Through First Nine Months 2023 Price Behavior

Table 3 is a final look at long and short NDX 1-day ATM straddle behavior. This table combines observations for both 2022 and the first nine months of 2023. Monday stands out, as expected, as the best day for straddle sellers. Thursday was the best day to be long volatility over this 21-month period.

Table 3: 1-DAY NDX ATM Straddle Performance For January 2022 – September 2023

Data Sources: Bloomberg And Author Calculations

Of note is the Percent Inside figure for Thursdays at just under 40%. This figure can also be interpreted as how often straddles sellers profited and buyers realized losses. This number is significantly lower than the 54.47% average and the only result under 50%. Thursday is not the most volatile day, based on average price move, but it is the day where the straddle is often priced the lowest at an average straddle price of 1.14%. The loss for options sellers is not purely a function of excess volatility, but due to consistent underpricing relative to the subsequent price change.

Figure 3 shows the performance for both strategies. Although Figure 3 displays the data from previous figures, this longer look at long and short straddle does have a story to tell.

Figure 3: 1-DAY NDX ATM Straddle Performance For January 2022 – September 2023

Data Sources: Bloomberg And Author Calculations

Starting in November 2022, the performance for each strategy has been range bound. Both profit and loss lines stay in a range of about 1000 points, periodically on the high end and low end of that range. This is closer to expectations and represents more accurate option pricing relative to the NDX price changes.

ATM straddle pricing by month is broken down in Figure 4. This chart depicts the higher and lowest straddle premium as a percentage of NDX along with the average premium by month. The bar spans the low to high range and the average appears as a dot. Note the average is usually closer to the low end than the high end of the range.

Figure 4: 1-DAY NDX ATM Straddle Pricing As A Percentage Of NDX

Data Sources: Bloomberg And Author Calculations

The premiums adjusted lower in about April which follows a period where four out of five months were profitable for sellers. Specifically, for the five months spanning December 2022 through April 2023 all but February 2023 was profitable for sellers. The loss in February 2023 was just over 5-points, so the five months leading up to and including April 2023 are the most consistent performance period for straddle sellers over the period analyzed. Figure 5 breaks down monthly performance by best, worst, and average results for a straddle seller.

Figure 5: 1-DAY NDX ATM Straddle Performance Breakdown By Month

Data Sources: Bloomberg And Author Calculations

Each profitable month is represented by a green marker and losing months by a red one. In 2022, there is a lot of red with eight of the twelve months resulting in losses for straddle sellers. In 2023, five of the nine months are profitable for sellers. Most of the losing months have a major loss, such as November 2022 when an ATM straddle sellers would have encountered a loss over 500 points. NDX rallied over 7% on November 10, 2022, the straddle priced a move of 2.63%, which was much higher than average, but not enough to offset losses from that day’s rally. This was a day where the market reacted to a favorable Consumer Price Index (CPI) report.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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