Mid-Year Review: Short-Dated NDX Option Price Action

Short-dated index options have been all the rage for the past couple of years. The Nasdaq-100 (NDX) option market has been a big beneficiary of widespread use of short-dated options. For example, average daily volume (ADV) in the NDX complex has more than doubled since January 2023. Additionally, volumes continue to trend higher and the highest ADV over the past 18 months was recorded in this past month. 

Data Source: Bloomberg & Author Calculations

We have been tracking the pricing of short-dated NDX options beginning with January 2023, focusing on at-the-money (ATM) straddle pricing for tenors between one and five days. Most attention and trading is focused on the options expiring the following day, however, it appears better opportunities for option sellers are available using options expiring in three, four, or five days versus one or two.

We once had an opportunity to ask a legendary option trader (Ed Thorp) where he was looking in the market for opportunities. His response was something to the effect of, “I like to look in areas where no one is focusing.” It may just be with everyone looking to the very short-term (one day or less) that the opportunities for profits are available to traders using options expiring in a few days.

Methods

The following data takes the mid-point pricing of the bid-ask spread of ATM options (ATM straddle) to determine pricing. To account for trading costs, 2.00 points is subtracted from the straddle price. The trade is assumed to be held into cash settlement so there is no cost to exit the trade. Finally, there is not a PM settled NDX contract for the third Friday of each month, so there are no trades using that expiration. Results are broken down by month in the sections below.

One Day ATM Straddles

Selling the 1-Day ATM NDX straddle on a consistent basis over the course of 2023 resulted in a small loss of 97.85 points. Recall the cost of trading is 2.00 points and there were 237 observations for the year. The cost of trading, using our method, would be 474.00 points, so we can safely say that the 2023 loss represented in the table below is a result of the cost of trading.

Data Source: Bloomberg & Author Calculations

The first four months of 2024 were also difficult for NDX 1-Day straddle sellers with losses totaling -476.18 year to date though the end of April. However, the last two months of the second quarter were profitable for option sellers and as of the end of June 2024, a straddle seller would be up 78.37 points for the year.

Data Source: Bloomberg & Author Calculations

The small loss in 2023 and smaller gain in 2024 reflect market efficiency with 1-Day ATM straddle pricing. In the option market, typically options are slightly overpriced over time and the expectation would be for small gains for sellers over a long period of time. However, when a small amount of slippage is incorporated into the pricing, the result is closer to breakeven than a profitable strategy.

Two Day ATM Straddles

In 2023, sellers of ATM straddles using NDX options would have racked up almost 207.00 points of profits. This is despite the cost of trading that needs to be overcome. Note that two of the best months were March and April 2023, something that led us to do some more digging.

Data Source: Bloomberg & Author Calculations

The chart below shows the average pricing of 2-Day ATM straddles as a percentage of the underlying index from January 2023 – June 2024. For example, if the index is at 100 and the straddle is priced at 2.50, the pricing is 2.5%.

Data Source: Bloomberg & Author Calculations

We highlighted March and April 2023 on the chart to show a distinct change in the pricing of 2-Day straddles after a very profitable March. The pricing dropped as market participants recognized a consistent overpricing of the 2-Day straddle. After a profitable April, the pricing moved lower and has not averaged over 1.5% since.

Sellers of 2-Day straddles in 2024 would have not fared very well incurring hypothetical losses of -439.93. The best month was April, with gains of over 413.00 points, which if you glance back at the pricing chart above, was the month in 2024 with the highest ATM straddle pricing.

Data Source: Bloomberg & Author Calculations

Three Day ATM Straddles

Three-day straddle pricing is where things start to look up for option sellers. In 2023, a consistent seller of 3-Day ATM straddle would realize profits of over 1900.00 points. Selling options as a strategy is often referred to as picking up nickels in front of a steam roller. May and November are months were option sellers encountered the steam roller with losses of -1025.18 and -911.42 respectively. However, there were a few profitable months (February, March, and April) that more than made up for these bad months.

Data Source: Bloomberg & Author Calculations

By the end of January 2024, anyone that consistently sells 3-Day straddles may start questioning the viability of this approach after encountering losses of -1275.66. However, by the end of the first quarter, this approach turned profitable and then some. For the second quarter, April’s profits were more than offset by May and June losses. However, for the year, profits stand at 960.36.

Data Source: Bloomberg & Author Calculations

Four Day ATM Straddles

A consistent seller of ATM NDX straddles expiring in four days would also have experienced the steam roller in May and November of 2023. However, the net result is a gain just short of 2500.00 points.

Data Source: Bloomberg & Author Calculations

Like the 3-Day results, January 2024 was also a terrible month for 4-Day NDX straddle sellers with losses of -1970.86. By the end of January about 80% of 2023 were wiped out. However, those losses were made up by strong performance in February and March. The second quarter was profitable, despite a difficult June, as cumulative gains for April and May outpaced losses in June.

Data Source: Bloomberg & Author Calculations

Five Day ATM Straddles

Five-day results are not an improvement versus selling four-day straddles. Profits in 2023 came in about 500.00 points 2023 four-day results with a profit of 1906.83 points. Also, note the November 2023 loss of -2471.03 which is greater than the profit for all of 2023.

Data Source: Bloomberg & Author Calculations

January 2024 was the second worst of the eighteen months of data used for this lookback with losses of -2175.18. However, the following two months put up gains of 2000.00 points. The second quarter results for 5-Day straddle sellers are slightly positive and for the year, the five-day results are running at 193.89 points better than 4-Day straddle selling.

Data Source: Bloomberg & Author Calculations

From a high level, it appears the opportunities for short-dated NDX options sellers is best when looking out beyond a couple of days or where most people are not focusing on trading. We have tested ATM straddles and are currently working on systematic iron condor approaches to see if paying to limit losses increases profitability or at minimum smooths out results. Also, we have combined selling short-dated straddles with purchasing long- dated straddles and will follow up with those results later this week.