February 1, 2023

Nasdaq-100 In January: Looking Forward To A New Year

The New Year holiday is one where we all reassess the past year and look forward to the year in front of us. Many of us will head to the gym a few times this month or spend a little more time on the Peloton with the belief that this year will be different.

The Nasdaq-100 (NDX) also looks forward to the New Year with enthusiasm and relatively strong performance. The chart below shows the average move by month for the Nasdaq-100 from 1990 to 2021. Outside of October and November, January is on average a solid month for NDX with an average gain of 2.17%.

Data Sources: Nasdaq & EQDerivatives Calculations

On a win percentage basis, January also stands out as one of the better months. The chart below shows that in January NDX has risen a little of 65% of the time between 1990 and 2021.

NDX percent higher by month

Data Sources: Nasdaq & EQDerivatives Calculations

So January is a good month for NDX, how do traders take advantage of this? With NDX options expiring on the last trading day of January (Jan 31) there are plenty of ways to play this. First, a historical example from last year. NDX finished 2020 at 12,888 an on the last trading day of 2020 a trader bought the NDX Jan 29th 12875 Calls for 315.35 and sold the NDX Jan 29th 12925 Calls for 286.40 for a net cost of 28.95 and payoff at expiration that appears below.

NDX bull call spread

This is an example of having a defined risk / reward based on a one-month outlook for the NDX. I also like this trade because it practically nailed the end of Jan 2021 closing price for NDX of 12925.38.

Fast forward to recent trading and there were a couple of trades that caught my eye on the last trading day of 2021. First, was a seller of the NDX Jan 31st 15600 Puts for 135.60 when NDX was trading around 16376. This trade is not for the faint of heart and I personally would be more comfortable combining this short put with a long put farther out of the money. If held through Jan 31 expiration the payoff diagram below shows the potential outcome.

Short NDX

This trade has a break-even level about 4.5% lower than where NDX as the trade was executed. Doing a little digging, I found that 15% of Januarys going back to 1990 experienced a drop greater than 4.5%. This is another reason I would want some sort of protection against a large drop in January.

Finally, a trade structure I like a lot, especially when there is a lot of uncertainty in the market, hit the tape mid-day on Friday Jan 31. With NDX at 16390 a trader sold 1 NDX Jan 31st 15000 Put for 67.65, bought 2 NDX Jan 31st 15500 Puts for 117.29 each and finished off this trade by purchasing 1 NDX Jan 31st 16000 Puts for 209.93 for a net credit of 43.00. The potential outcome for this trade at expiration appears below.

Short NDX

Although January is a historically good month for NDX, there are some concerns about equities going into 2022 and this trade structure to benefits from NDX moving higher or even dropping by less than 2.38%. A dramatic drop of more than 8.48% places NDX below the lower long put strike and in the range of a profit equal to the credit of 43.00 taken in when the trade was initiated.

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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