hi guys Newer options seller here. I can't understand when people write options. Why is there so much more traffic through SPX then NDX? NDX pays more ( I'm calcuating per $100.. ) on weeklies or even bi-weekly. Isn't the point of selling premium to capture as much as possible?
Answer your question with a question - a stock with a volatility of X has an option with a premium of $1.00 - stock with a volatility of 2X everything else is identical in terms except the premium is $2.00. Which is a superior write? $1.00 $2.00 They are the same It's not a trick question.
Probably has more to do with liquidity why people go to SPX.... The point of selling options premium is mainly to capture the difference between implied vol and realized vol. The implied vols (and therefore relative premium) in NDX is higher than SPX because the underlying stocks on the Nasdaq are more volatile than S&P500. And also... 100 stocks vs 500 stocks... 500 stocks are more diverse than 100, especially when comparing mainly tech NDX vs broader market S&P500.
Thank you guys. The problem I still have is even and this can't be an equal even as I am no mathematician. I use what I call "safe zones" and even comparing the two. In the safe zones of each. They don't even match up if one could equally match them. I find the strike zones for SPX end far faster then The NDX... if all things were equal in my non equal equation I use... NDX is still superior even if I see that the vol accounts why NDX premium is higher. I'm still saying why anyone would take less of my calculations were half right if you could "equalize" them who wants less ? Just take a look around NDX AND SPX and you'll see you can go way farther down the strikes of NDX then SPX equivalent if you try to compare the two ( which I roughly calculate out ) I play multiple stocks and indexs at once to get a feel... I've found I might not be able to articulate what I experience but I know by my results. NDX is far superior then SPX all things relative. Has anyone else felt the same? I love the answers by the way. Thanks for all the gained knowledge.
I honestly never knew NDX existed. But look at QQQ, it's much more liquid with the same exposure, more or less. But you can sell a diverse portfolio of SPX or QQQ components and hedge against a systemic move for a fraction of the premium you collect. Gives you similar upside exposure (with the exception that you're retaining the "news risk" of each individual component), but you lose a lot of the blow out exposure if there's a systemic move against you.
Safe zones... you need to be more specific mate... give us numbers. What option or index level are you looking at in NDX and SPX? Movement dictates volatility, which dictates implied volatility... which in turn dictates options pricing and probabilities... Those are all calculated the same way. It's really no different from SPX or NDX. Say IV in NDX is 2x SPX. SPX spot = 2500; IV = 10; ATM straddle (30day options) = 57 This straddle more or less gives the 1 SD move in SPX, which is comes to 2.28% (57/2500) NDX spot = 6000; IV = 20; ATM straddle = 273 This straddle gives a 1sd move of 4.55% in NDX... which is double the SPX 1sd move... since the implied vol is 2x the one in SPX So... if you determine a 'safe zone' or anything beyond 1 sd move = safe... safe zone SPX = <2443 and >2557 safe zone NDX = <5727 and >6273 They are the same in risk terms... because you should determine the risk based on the products volatility...
SPX is better when you look at backtest its just better. SPX = more weeklies , better strikes, better overall results pnl wise
Now... even if the IV is the same... the straddle value of NDX will be higher than SPX, since it's linked to the underlying value. SPX straddle = 57 on IV=10 NDX straddle = 137 on IV=10... which is 2.4x SPX straddle... since NDX spot is 2.4x SPX spot. They are both 2.28% safe zone SPX = <2443 and >2557 safe zone NDX = <5863 and >6137 Now, the value of say the 2443 put in SPX (depending on skew) would be roughly 10 The value of the 5863 put in SPX would be roughly 24 Again... they are the same relative value compared to the strike price.... because the vols are the same.... But the underlying value determines the dollar-move, which is larger in NDX (2.4x). I have to point out though, it also depends on vol skew... which kinda further pictures the risk appetite of the market.