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Combining Long And Short Dated Straddles Using NDX Options

We recently published a performance review of at-the-money (ATM) NDX straddles with between one and five days left to expiration. One finding was that consistent sellers of 3-Day, 4-Day, and 5-Day NDX ATM straddles were profitable over the fifteen-month period running from January 2023 – March 2024. That review may be found here –

First Quarter 2024 Review – Short Dated Nasdaq-100 Index Options

The response to this piece was overwhelming and the variety of suggestions as to other approaches using this data will keep us busy for some time. One idea was to combine long NDX option positions with short dated short straddles. A first run at this suggestion yielded promising results. Before jumping into a combined approach, a quick review of short 3-Day straddles follows.

Short Straddle Method

For each short ATM straddle, we use the mid-point pricing of the bid-ask spread and then subtract 2.00 points from the credit to account for slippage and commissions. The short position is exited on the close at expiration.

3-Day Short ATM Straddle

Table 1 shows some high-level statistics associated with consistently selling 3-Day ATM NDX straddles on the close and holding through settlement. This approach was profitable eight of fifteen months in our lookback period. A total of 2,870 points in profits would be realized with this approach. Do note on the table, there are a couple of months with over 1,000 points in losses (May 2023 and January 2024), so this approach is not without risk and pain.

Table 1 – Short ATM 3-Day Straddle Performance

Options table

Data Sources: Bloomberg & Author Calculations

As mentioned, we have received many suggestions on how to enhance or smooth out the performance associated with consistently selling 3-Day ATM NDX straddles. One suggestion was buying a longer dated ATM straddle that would theoretically profit when short straddles lose value. We decided to look for straddles with a month to expiration as the long straddle to combine with short 3-Day straddles.

Long Straddle Method

On the last Friday of each month, an ATM straddle expiring on the last Friday of the following month was priced using the mid-point of the bid-ask spread. The last Friday of each month was chosen instead of the last day of the month due to expiration availability and liquidity. Like the short straddle approach, we added 2.00 points to account for slippage and commissions. The monthly results appear below, combining 1, 2, or 3 long straddles with the short 3-Day straddle approach.

Table 2 – Short ATM 3-Day Straddle Performance

Options table

Data Sources: Bloomberg & Author Calculations

The first column with data shows the monthly performance associated with buying an ATM straddle that expires on the last Friday of the following month as described in the methods section above. This approach was higher eight months and lower seven months which was the same as shorting a 3-Day straddle (column 2). There is only one month (July 2023) where both approaches were losers.

The third, fourth, and fifth columns show results from combining the long and short straddles into a single strategy. These columns show the performance associated with buying 1, 2, or 3 straddles to match up with the short 3-Day straddle approach. Recall, if a trader follows the short 3-Day approach, they will often have three short positions at a time, all with different expirations. The exception is when the third Friday of the month falls within the 3-day window as there is no PM settled NDX series on the third Friday of the month.

The combination of a long longer dated straddle with the short straddle approach improves across each three combined approaches. The number of months will losses is reduced to three if only one straddle is purchased, four when the approach buys two straddles, and five when three straddles are purchased.

The only discouraging data points were September 2023 when buying two or three straddles overwhelmed the short straddle performance and January 2024 where the long straddle performance, while positive, was not sufficient to offset much of the 1,275-point loss from shorting 3-Day straddles that month. Figure 1 shows the daily performance for each approach combining a longer dated long ATM straddle and short 3-Day ATM straddles.

Figure 1 – Long 1-Month / Short 3-Day ATM Straddle Performance

Options chart

Data Sources: Bloomberg & Author Calculations

Although the performance is smoothed out when combining long and short straddles, there are some significant drawdowns. A prime example is late 2023 into early 2024 where each approach had a drawdown of over 1,000 points. Combining 3 long straddles with shorting 3-Day straddles experienced a drawdown of over 2,000 points.

We will continue to use our compiled data to test approaches using NDX options. Suggestions are welcome and are best submitted at russell@listder.com

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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Russell Rhoads, PhD, CFA

Russell Rhoads, Phd, CFA is a highly regarded strategist, educator, and consultant – among other things he is perhaps best known as the author of Trading VIX Derivatives, the textbook in the space.

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