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NDX

Nasdaq-100 Takeaways From The First Quarter 2022

So far, this has been a year like nothing in recent memory and it is only 25% done. It is doubtful many market participants expected inflation to push double digits along with the threat of a major conflict brewing in Europe. In reaction to world events, the Nasdaq-100 (NDX) gave up just over 9% in the first quarter, the worst performance since the first quarter of 2020, which coincided with the early days of the pandemic. Despite the tough quarter, NDX was up just about 90% since the end of Q12020, a pretty nice return.

Relative Market Performance

NDX trailed the S&P 500 (SPX) by just over 4% with SPX losing about 5% on the quarter. If we look back to quarterly performance starting with the first quarter of 2000, NDX has outperformed SPX about 65% of the time. Also, and probably a bit more interesting, the last time NDX fell short of SPX for two consecutive quarters was in the first half of 2016.

Options chart

The chart above shows the relative performance of SPX and NDX over the course of the first quarter. Both are indexed to 100 as of the last day of 2021 for a clean side by side comparison. The widest point between the two is on March 14 when NDX was down just over 20% for the year and SPX was down 12.44%. Over the last two weeks of the quarter, NDX bounced off the psychologically significant down 20% level.

Elevated NDX Volatility

Historical data for the Nasdaq-100 Volatility Index (VOLQ) stretches back to 2014 and the relationship between VIX and VOLQ over this time period has been interesting. Between 2014 and 2021 VOLQ closed at a premium to VIX about 60% of trading days. This past quarter VOLQ closed at a premium to VIX 94% of trading days, likely as a function of NDX underperformance. The following table shows the percent days VOLQ closed higher than VIX by quarter going back to 2014.

Options chart

Note during the second quarter of 2020 VIX closed at a premium to VOLQ every day. This is a function of macroeconomic or global issues putting pressure on the financial markets. The second quarter of 2020 was the first full quarter that the full impact of the pandemic was influencing all aspects of our lives.

Individual Stock Performance

For the first quarter, about 20% of NDX stocks had positive results, which is to be expected with NDX losing 9% for the quarter. There is not much uniformity in the names that were the best performers with software, retail, and even a utility in the blue column below. 

Options chart

The four worst performers are companies that benefitted from lockdown with each giving back over 40% during the first quarter. I decided to see where these four stocks (PYPL, NFLX, ZM, and FB) were at the end of Q1 versus the end of February 2020. I use February 2020 as it was just before the pandemic fully impacted US markets. In each case, the stocks are up slightly from that date, despite the 40% drawdown so far in 2022.

NDX Component Earnings Reactions

NDX is a capitalization weighted index with a handful of stocks have a big influence on the index’s performance. Earnings season was a mixed bag for the largest NDX components with both upside and downside outlier moves as highlighted on the following table. The option prediction column refers to the at the money straddle pricing just before earnings and the average move is the average of the stock price reactions over the previous two years or eight quarters.

Options chart

Seven of the ten largest NDX stocks reported in late January or the first three days of February this year and all seven had a price reaction to earnings greater than the average move over the past eight quarters. For instance, AAPL rose 6.98% in reaction to earnings, a bigger move than the average changes over the previous eight quarters of 3.30%. NVDA reported a couple of weeks later and the option market expected a large move (+/-8.46%) versus history (+/-3.16%). Typically, the option market predicts wider moves after an outlier move in the previous quarter. With all the large NDX stocks that reported a couple of weeks before NVDA experiencing outlier moves NVDA options priced in a much larger move than is expected based on history. I would also expect elevated implied volatility (and VOLQ by association) going into the earnings season later this month.

Trade Of Interest

I normally discuss short-term option trades in this space, but options can be used to create a structured outcome over a longer time. One trade I found interesting was a put sale on March 31 using an NDX put that expires on the third Friday of December. With NDX at 14990 a trader sold the NDX Dec 16th 13500 Puts for 737.00 each. The payout at expiration appears below.

Options chart

Based on the 737.00 premium and NDX at 14990, the return is 4.92% is anywhere above 13500. Once NDX is up 4.92% from current levels, buying the index outperforms this short put trade. The short strike price, 13500, is 9.94% lower than where NDX was trading when the trade was executed. Break-even for this short put trade is down at 12763, a drop of 14.86%. Selling puts can be a bit worrisome, but this trade has a nice buffer before worry would set in. Finally, the closing low (so far) for NDX in 2022 is 13046, which does place the short puts in the money, but not to a point where this trade would be a loser. If this were my trade that would be a significant price level I would be keeping an eye on for the balance of 2022.

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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