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EQD Research: Sell In May And Go Away? Not So Fast…

May 22, 2021

By Russell Rhoads,
head of research

There are several old Wall Street sayings that those of us that have been around since the last century are used to hearing.  One that does not get thrown around as much as it use to is “Sell in May and go away”. Which basically meant that traders and investors would not miss out on much if they choose to take the time between Memorial Day and Labor Day off. For those outside the US, Memorial Day falls on the last Monday of May (May 31 this year) and Labor Day is the first Monday of September (September 6 this year).

The reality is following the ‘Sell in May’ statement just means missing out on positive performance six of the last seven years.  The table below shows the performance of the S&P 500 and the Nasdaq-100 from the Friday before Memorial Day to the Friday before Labor Day for each of the past seven years.

Data Sources: Bloomberg / EQDerivatives Calculations

After putting an initial table together something did pop out at me and caused me to add a column showing the relative performance. The Nasdaq-100 has outperformed the S&P 500 each of the last seven summers. That combined with the Nasdaq-100 underperforming other major market indices so far in 2021 means a long NDX position this coming summer makes sense for those bullish on US stocks.

I shared the table above on an episode of EQD Research Global Insights and received some feedback that NDX consistently outperforms the SPX which is true for the long term. I ran the same numbers using Labor Day to Memorial Day pricing, the time period the ‘sell in May’ phrase says one should own stocks. This result shows about a 50/50 performance split between the two. The table below includes the current time frame that still has a week until the Friday before Memorial Day 2021.

Data Sources: Bloomberg / EQDerivatives Calculations

So what does change during the summer? Volatility definitely adjusts a bit lower during the traditional vacation months. Both expected and realized volatility drop off during the summer months. The table below shows the average close for Nasdaq-100 Volatility Index (VOLQ) between Memorial Day and Labor Day as well as the realized volatility for the Nasdaq-100 over the summer months.

Data Sources: Bloomberg / EQDerivatives Calculations

There is a wide range for both expected and realized volatility over the summer months with VOLQ averaging between 12.00 and 27.47 each year with a long term average at 16.73. The realized volatility ranges from 9.61 to 23.56 and averages 16.69. For comparison sake, the same numbers for the Labor Day to Memorial Day time period appear in the next table.

Data Sources: Bloomberg / EQDerivatives Calculations

The ranges are higher for both volatility measures across the board, which is indicative of a true difference in the summer month trading environment versus the non-summer months. VOLQ averages about 2.00 points higher at 18.70 and the average realized volatility is about 4.50 points higher at 21.02.

What can be taken away from all these calculations is NDX has outperformed during the summer months, but also that volatility is a bit lower during the summer. So how would a trader, who is bullish on stocks, take advantage of this outlook using NDX options?

NDX closed at 13411.74 on Friday May 21. The average return for the NDX over the summer months is 7.43% which results in a target price for NDX of 14400. The best options for the timing of this outlook are the standard NDX options expiring on August 20.

A pretty basic strategy takes a long position in the NDX Aug 12000 Call paying 1635.00 and combines it with a short position in the NDX 14400 Call which could be sold for 172.50. The result is a cost of 1462.50 per spread and a payoff at August expiration appearing below.

The net result of the spread results in a profit of 937.50 if the Nasdaq-100 is at or above 14400 at August expiration. This lags a long position in the NDX by just over 50 points, however, the returns do offer leverage. Plus if the Nadaq-100 comes under pressure losses are capped at the cost of the spread, 1462.50.

Admittedly, at $146,250 ($100 x 1462.50), the dollar cost of this trade is out of reach for many traders, however, Nasdaq launched the Nadaq-100 Micro Index (XND), which is 1/100th of the quoted size of the Nasdaq-100. Nasdaq also launched options on XND, which offers a more reasonable dollar cost for many traders to take advantage of this outlook.

The Friday May 21 close for XND was 134.12 and the same outlook as the previous trade would buy the XND Aug 120 Call for 16.35 and sell the XND Aug 144 Call for 1.72 resulting in a cost of 14.63 per spread.  The XND version of this trade’s outcome appears below.


The payoff for this trade is in-line with that of the trade using the traditional NDX options, however the dollar cost for the XND version comes in at $1463, a more reasonable price level for many traders. Also this is price level offering the chance to size the position through trading multiple contracts. Finally, a trader who likes to trade around or even scale in and out of positions.