Mastering Market Volatility: Trading Strategies for the Nasdaq-100 Index® in a Dynamic Capital Market

Expect the Unexpected

For years, I’ve believed that volatility is the primary driver of investment. It’s an inarticulate encapsulation of a capital markets theory, but when all the rhetoric is boiled away, volatility remains. Chris Cole, one of the “blue flame” thinkers in derivatives, put it best in The Allegory of the Hawk and Serpent: “Volatility is never created or destroyed, only transmuted.”

In my opinion, humans have evolved for millennia against a backdrop of volatility. The volatility of our ancestors would be unthinkable in the modern age. The ability to manage uncertainty is hardcoded in our DNA.

Capital markets, and options in particular, continue to grow because they allow us to tap into a biological drive to thrive despite pervasive uncertainty. Throughout time, those best equipped to navigate ambiguity have survived and advanced the species.

Nonlinear Exposure

Let’s focus on options. Their “nonlinear” exposure mirrors life in so many ways. There’s an assumption about future volatility embedded in every option’s value (price) that changes dynamically.

Typical narratives (think: romantic comedy, etc.) are linear. There’s a predictable structure: setup, confrontation, and resolution. This generic approach can be financially successful, but they don’t tend to have a lasting impact.

Contrast that with a less predictable form of entertainment, such as sports. There are recognizable subplots with characters, rivalries, and far more uncertainty. Unsurprisingly, the amount of money flowing into “event contract” markets are dominated by sports. Uncertainty is the currency.

According to American Gaming Resources, in 2024, more than $150 billion was wagered on sports in the United States. Trading volume in sports event contracts is estimated to reach more than $13 billion this year. For the sake of comparison, total box office receipts for the U.S. and Canadian markets for films in 2025 are likely to be ~$8.8 billion.

We vote with our wallets and uncertainty is “valuable.” So, too, are options.

Da Bears as Da Example

Last weekend, I was surrounded by family and the unpredictable nature of sports provided for an unforgettable evening. For three and a half quarters, our home team (the Chicago Bears) looked overmatched by their rivals from Green Bay.

Then something remarkable happened. Those willing to bet on the improbable were rewarded spectacularly. The same dynamic drives billions in capital markets, and it’s accelerating.

With a few minutes left in the 4th quarter, the equivalent of a “call option” on the Bears to win was less than 1 delta. Running with the options analogy, the Bears were like the NDX April 9th (2025) expiring 19,000 strike calls. Those options were way out of the money and traded between 0.05 and 0.20 for most of the session. NDX measured below 17,100 during morning activity.

And change creates opportunity.

Once again, a play-by-play is unnecessary, but NDX moved from ~17.1k to ~19.2k with velocity. The small delta call options that were worth between $10 and $20 settled worth $145.06 ($14,506).

Source: LiveVol Pro

Things Change

Over the next few weeks, there will be predictable lookbacks at capital markets in 2025. As an intellectual fan of history, I welcome this coverage, but its “value” is marginal. In many ways, it’s like average return analysis. The calculation is pedestrian. The output is “interesting,” but there’s no such thing as an “average” year in capital markets.

That is precisely why markets are so compelling!

Statistics

The Nasdaq-100 Index® (NDX®) celebrated its 40th anniversary this year. We have nearly a half century’s worth of data to evaluate. As we look toward 2026, let’s reflect on the past through the lens of historical statistics. The numbers may tell a story that many investors miss.

Source: Nasdaq

What’s the takeaway?

• NDX tends to move higher over the course of a calendar year. Historically, more than 80% of years have been positive.
• “Average” (both mean and median) returns have been strongly positive.
• When NDX declines, it tends to move meaningfully lower.

Source: Nasdaq

NDX is likely to post its third consecutive 20%+ annual return in a row. In six of the past seven years, NDX has gained more than 20%. It’s been a spectacular run with a speed bump in 2022.

Give Me Some (Roberta) Flack

Historically, the “knock” on NDX would be characterized in a couple of ways:

• “It’s just a technology index.”
• “It exhibits higher volatility.”

I’m reminded of the 1969 Roberta Flack song Compared to What. The real question isn’t whether NDX is volatile, it’s compared to what?

For most investors, the default alternative is the S&P 500 Index. Investment decisions can have very meaningful implications, and your “default” behavior should be examined. As I’ve mentioned in the past, benchmark indexes change.

For example, in late 1985, Louis Rukeyser would focus attention on the performance of the DJIA. The “other” indexes covered included the NYSE Composite, S&P 500, AMEX, and OTC (which was the Nasdaq Composite). NDX was in its infancy and not even mentioned during the typical newscast.

Source: PBS Wall Street Week

In 2025, coverage centers around the S&P 500. The only people talking about the DJIA these days have an AOL email. Things change.

When I try to look out another decade or two, I believe that NDX will be the “headline index.” NDX’s technology and growth bent is becoming an advantage in our increasingly digital economy. NDX may align better with long-term wealth creation in the technology-driven 21st century. Time will tell.

Volatility

Source: Nasdaq & S&P Global

Source: Bloomberg & Nasdaq

If we look at the past four decades, NDX has been more volatile than the S&P 500. The visual above plots the past 40 years of annual index returns (5% wide buckets) for the S&P 500 (purple) and NDX (blue). The Y axis shows the number of years returns fell in each bucket.

Roughly half the time (19/40 years) S&P 500 returns fell between +10% and +30%. The distribution for NDX is much broader. For example, in four calendar years, the index declined between 30% and 40%. On the other hand, there are ten calendar years where NDX climbed by 40% or more.

It’s a feature, not a bug. In many ways, volatility is the ultimate driver of returns. We invest because things change. The rate of change in the economy, and potentially in markets, will likely increase. To borrow a phrase from John Prine, “That’s the way the world goes round.”

Customize the Change

2025 has been another banner year for NDX option growth. Looking back to the end of 2022, average daily volumes have grown by 59.3% (2023), 39.2% (2024), and 49.7% over the past twelve months.

This market is growing because end users are increasingly gravitating toward NDX exposure. They are doing so both strategically and tactically. Many are using NDX options to customize their risk over discrete time frames. This is a trend that we expect to continue in the coming year.

Standard December 2026 NDX options are currently pricing an up/down expectation of 15.2%. In price terms, that forecasts a range of 22,890 on the downside and 31,110 on the high end. How does that compare to your expectations for the coming year?

Going back to the visual above, only seven of the past forty years have fallen between +/-15%. For those inclined to use an advanced statistical term, annual NDX returns exhibit leptokurtic tendencies.

The current forecast could change dramatically. Forecasting is a model-driven endeavor and the further out in time you venture, the murkier the forecast becomes.

Expect the Unexpected

Volatility isn't going anywhere—it's the constant that defines markets. But in 2026, as NDX options continue their explosive growth, you have powerful tools to transform that volatility from threat to opportunity. The question isn't whether markets will surprise you, it's whether you'll be positioned to potentially profit when they do.

Wishing you a very happy, healthy new year.