Ranges

The word “range” can conjure up a wide variety of mental images depending on your location or livelihood. What does the word naturally call to mind for you?

• A mountainous vista?
• A massive expanse of land with cattle and other wildlife?
• A luxury British SUV with a distinct shape and high maintenance costs?
• Perhaps a stovetop?
• Something else entirely?

If you’re a math or markets type (you’re reading this… it’s a safe assumption), then range implies the difference between the highest and lowest value in a set of data. Like all other statistical measures, the time frame you’re focused on matters. For example, over the past 52 weeks, the range for the spot Nasdaq-100® Index (NDX) is 14,058.30 – 18,907.50. Relative to the NDX settle at the end of 2023 (16,825.90), that works out to a 28.82% high-to-low range.

If we instead evaluate based on calendar years, the tendency for NDX to move in a significant range becomes clearer.

Source: Nasdaq

For the analysis above, we evaluated the annual high and low (H/L) points relative to the NDX settlement value at the end of the previous year. To clarify, the 2019 range is relative to an NDX value of 6,329.96 (12/31/2018). For the five full years between 2019 and 2023, the average H/L range works out to 48%. That measure skews higher as a function of the massive 2020 range. Excluding the COVID panic and rebound, the average comes out to a slightly more pedestrian 42.4% range.

Let’s now apply the same range logic to the S&P 500 Index (SPX).

Source: Nasdaq

The overall numbers are similar, but lower across the board for the SPX. The average, including 2020, is 33.9% and, excluding the pandemic year, comes down to 32.2%. Understanding average annual ranges can be helpful for longer-term financial planning and setting appropriate expectations. These metrics all inform historical and implied volatility levels.

For passive investors, the term “volatility” comes with a considerable connotation. We understandably associate “volatility” with downside price action and risk. In this context, volatility is a rote calculation where the output expresses how much a value vacillates around a mean over a specific time frame.

It's easy to forget that equity indexes tend to climb over extended periods. We don’t naturally associate wider ranges and higher volatility measures as a potential benefit. This chart argues otherwise:

Source: YCharts

Zooming out – since the start of 2019, the larger annual moves have been a net positive for assets tracking the NDX relative to the SPX. In short, higher volatility can be a tailwind. Keep in mind that it’s possible to help manage volatility risk using index options.

Zooming back in and looking at daily moves, last Friday was one of the more volatile sessions of the past year. The chart below plots the daily high-low range in percentage terms (relative to the previous day’s settlement).

Source: Nasdaq

In calendar year 2024, the spot NDX value has had an average (daily) H/L range of ~1.1%. As the month of May ended, the range was nearly double the average.

Despite one of the Federal Reserve’s preferred inflation metrics coming in slightly below expectations, equity indexes were broadly lower at midday. The NDX declined by nearly 350 handles or about 1.9% before making a “U-turn” in the afternoon and closing relatively unchanged.

Whether you attribute the move to end-of-month positioning, momentum, or something else – it’s history. It was the “most volatile” day since (ironically) the first of May. There have been six sessions with intraday ranges greater than 2% for NDX over the past 17 months. Most of them occurred in April (2024).

The question becomes, is higher volatility reemerging like the cicadas after a period of dormancy?

Are we likely to experience a month like April, where the NDX had a 7.8% range relative to the March settle?

Although I don’t have the answer, there is a tool to potentially benefit from these moves in the form of Nasdaq-100 Index Options (NDX) or Nasdaq-100 Micro Index Options (XND). They are cash settled, which many option traders prefer. As a result, you don’t need to roll/close positions to avoid ending up long or short the underlying via in-the-money options (unlike ETF and equity options).

If the end of May is any indication, NDX users are looking to participate. It was the most active day (volume) for the NDX since March 8, when the index had an intraday range of 2.3%.

Happy summer.