The Battle of the Indices (NDX vs. SPX) for Options Traders

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Many investors view the major market indices that track the broader markets to be similar in performance. However, the two most popular indices have a very strong correlation, but the performance difference may surprise you. The Nasdaq-100 and the S&P 500 index have a 90-day rolling correlation that is typically higher than 90%. On most trading days, the two indices trade in lockstep; however, it may be surprising to learn that the Nasdaq-100 has averaged annualized returns that are 65% higher than the S&P 500 over the past 13 years. Moreover, trading options on these two indices have provided drastically different returns over that period. In this post, we pit these two major indices against each other to find the best performer for options traders.

The Nasdaq-100 Index and the S&P 500 are two of the most popular indices used by traders

The S&P 500 index (SPX) tracks the largest 500 companies trading on Nasdaq and the NYSE. Due to its size and diversification, the S&P 500 is closely followed by investors to gauge the overall performance for US equities. The Nasdaq-100 Index (NDX) tracks the largest 100 non-financial stocks listed on Nasdaq based on market capitalization. Due to its emphasis on Technology and other top performing industries such as Consumer Services and Health Care, NDX has experienced substantial growth in recent years and has outperformed SPX in 11 of the past 13 years.

The Outperformance of NDX

The charts below highlight the total returns of NDX and SPX from January 1, 2008, to December 31, 2020. NDX has outperformed SPX during this period with a cumulative return of 608% compared to SPX’s 236%. The annualized return for NDX and SPX between 2008 and 2020 is 16.2% and 9.8%, respectively. Additionally, the NDX’s volatility is only 2% higher than SPX, providing a better risk-adjusted return.

Chart 1: Nasdaq-100 Index vs. S&P 500 Performance

Return performance

Source: Nasdaq

Chart 2: Nasdaq-100 vs. S&P 500 Volatility

Volatility, returns

Source: Nasdaq

Backtesting Results – Credit Spreads

Investors can access both indices through a variety of products, ETFs, futures, or options. In this post, we will explore trading same options strategy on these two indices. Many investors view NDX and SPX as interchangeable for trading income strategies such as credit spreads, but we found the difference surprising. 

Credit spreads are the most popular options strategy for index options. This strategy involves selling a “near-the-money” option and buying an “out-of-the-money” option, resulting in a net credit received. This strategy has a high probability of success as 2 out of 3 possible scenarios will result in a profit. Additionally, time decay (theta) works in favor of this strategy as the value of the credit spread erodes nearing expiration.

Index options provide a distinct advantage for index options over ETF options. The European-style cash settlement eliminates early assignment and exercise risk, especially attractive for credit spreads. Due to its popularity, we backtested the performance of credit spreads on NDX vs. SPX using ORAT’s Wheel Backtesting Platform. The rules for our credit spreads backtest are as follows:

Strategy Rules

  • Expiration Date Target: 45 days to expiry
  • Sell a 50 Delta (At-the-money) Put
  • Buy a 25 Delta (Out-of-the-money) Put
  • Exit the trade at 21 days to expiry
  • We only tested bullish Put Credit Spreads

The backtest ran from January 1, 2008, to December 31, 2020, and produced the following results:


Chart 3: SPX Backtesting Performance

Backtest report

Chart 4: NDX Backtesting Performance

Backtest report

The historical backtest results provide evidence that credit spreads are a stable income-generating strategy for both indices. However, the win rate was substantially higher for NDX over SPX at 69.76% and 64.39%, respectively. Moreover, the average return per trade for NDX (5.15%) was almost double that of the SPX (2.82%). NDX’s Sharpe ratio of 0.56 versus 0.33 for SPX speaks to an even better risk-adjusted return for investors seeking income using index options using NDX.

Due to the Nasdaq-100’s strong performance, major indices such as the Nasdaq-100 are now trading at very high values. This growth has resulted in the NDX index and even ETF options contracts being sizable and too expensive for many retail traders. However, with the Nasdaq-100 Micro Index Options (XND) launch, investors can now gain exposure to the Nasdaq-100 in a retail-friendly size. XND is a reduced value Nasdaq-100 Index that trades at 1/100th of the value of NDX and compares to an ETF priced at $130. With XND, investors can now gain exposure to the same performance of NDX Index Options in a contract size suited for retail traders.

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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Tony Zhang

Tony Zhang is a specialist in the financial services industry with over a decade of experience spanning product development, research and market strategist roles across equities, foreign exchange and derivatives. As the current Chief Strategist for OptionsPlay, Tony currently leads the research and development of their OptionsPlay Ideas & Portfolio platform. He has leveraged his interest in financial technology and product development to provide innovative reimagined solutions to clients and the users they seek to serve. Previously, he spent 7 years at FOREX.com with a capital markets and research background as a market strategist specializing in equity and FX derivatives markets.

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