Nasdaq-100® Index Options Structured Strategies for Options Traders in Today’s Market Davitt Data Bull Trap or Breakout? The Nasdaq-100 Index (NDX) continues its bull run in 2023. The bellwether measure has gained 26.5% in the new year (NDX reference 13,850). The market broke above the August 2022 highs (13,667.20) and is flirting with the 14,000 level. The charts below come from Callum Thomas and his #ChartStorm coverage. The top visual plots the NDX over the past three years. According to his analysis, there are various resistance points overhead, and the NDX remains ~20% below the all-time highs from late 2021. The bottom visual illustrates the divergent performance dynamic in today’s market. Specifically, it shows the percentage of NDX constituents trading above their 100-day moving average (100D MA). It’s one way to measure the breadth of participation. Focusing only on this calendar year, you can see that the rally in Q1 included a broader subset of NDX constituents. In early February, more than 80% of the NDX components were above their 100D MA. Since that point, participation has narrowed. In other words, fewer stocks are trading above their 100D MA (currently 63%). Put simply, market leadership continues to narrow, but the indexes are being led higher by the mega-cap names that make up the bulk of the NDX. Source: Twitter, @Callum_Thomas Do you believe the NDX will continue to trade constructively and test the next levels of resistance? Do you believe broader participation is necessary for a true breakout? Is a pullback in order? In all cases, that view can be expressed using the (notionally appropriate) NDX index options suite: Nasdaq-100 Index Options (NDX) Nasdaq-100 Reduced-Value Index Options (NQX) Nasdaq-100 Micro Index Options (XND) VIX, VOLQ and the Spread Shifting our attention to forward-volatility measures, the relationship between NDX implied vol (IV) and S&P 500 Index (SPX) IV is noteworthy. Keep in mind that the Nasdaq-100 Volatility Index (VOLQ) is a constant 30-day forward measure of expected NDX volatility based on at-the-money (ATM) options. By contrast, the CBOE Volatility Index (VIX) is a constant 30-day forward measure of expected SPX volatility based on a wide strip of options, including out-of-the-money (OTM) options. In other words, the VIX measure incorporates skew, and VOLQ strips skew out and isolates for ATM vols. Source: Nasdaq, Cboe Global This chart plots the relative values for the VOLQ Index (blue) and VIX Index (red) on the left-hand scale. The data goes back to Q4 of 2019, so it incorporates the acute selloff associated with the COVID-19 pandemic. From my perspective, what stands out is that the spread between the two measures (plotted in black and uses the right-hand scale) typically narrows when VIX and VOLQ move up quickly. In nearly every situation over the past three-plus years, when forward-volatility measures pop, the spread between VIX and VOLQ narrows (and sometimes inverts). That dynamic makes sense, given the distinct methodologies for the two volatility measures. As we move toward June, the spread between VIX and VOLQ is behaving more like it did in 2021. That period is outlined in purple above. Back then, equities were particularly buoyant. Fiscal (CARES Act, etc.) and monetary (record low interest rate policy) stimulus propelled asset prices. Now, the Federal Reserve continues to focus on quantitative tightening with higher rates. There’s no ongoing fiscal stimulus, and Congress is considering restricting some benefits as a part of the debt ceiling negotiations. What that means for the future remains to be written. Is NDX volatility “cheap” relative to SPX vol? Is an index option cheap across the board despite single-digit SPX realized volatility and NDX 10-day vol at 12.2%? Are we set up for another leg higher with narrowing leadership? Like so many things… time will tell, but you can express your outlook or hedge against specific hazards using index options. Davitt Data will focus on relevant rates of change and the tools to manage them. Keep coming back! Kevin Davitt Head of Index Options Content kevin.davitt@nasdaq.com Replay Available! Structured Strategies for Options Traders in Today’s Market Realized and implied volatility levels have declined significantly. Volatility measures factor prominently in an option’s value. Evaluate some potential strategies for today’s market with Nasdaq’s Kevin Davitt. REPLAY HERE → Hungry for more options content? Explore these educational educational events and tools to learn more Longer Term Outlooks Using NDX Options All the rage is about short-dated options trading, but market participants still use the options market for a long-term outlook. Catch up with the Kelley School of Business at Indiana University's Russell Rhoads, Ph.D., CFA, as he explains a put trade from last week and the estimated payoff at June expiration. LEARN MORE → We Want to Hear From You! This month, we've discussed structured strategies for options traders in today's market and longer term outlooks using NDX options. WHAT WOULD YOU LIKE TO SEE MORE OF? → If you have any questions, don’t hesitate to reach out.