ONAs we approached August, market watchers and commentators cautioned the danger that August and September could hold for stocks. This way of thinking comes from recent history. In particular, mid-month sell-offs in the range of 12% to 13% for the Nasdaq-100 (NDX) in August 2011 and August 2015, as well as a 10% sell-off in September last year.
I decided to go back further than just the last decade and see if there was a pattern of weakness over the next few months. The first run looks at best, worst, and average performance along with the percentage observations that the NDX was higher monthly from 1990 to today.
Data sources: Nasdaq and EQD research calculations
The average performance for August is up 0.39%, while the average performance in September is a loss of 0.10%. This average performance is one of the three worst months for the NDX, with February in between. The NDX is 58.06% of the observations in both August and September. This means that the months are higher than three other months, but still in the lower half of the performance based on this metric. After all, the worst monthly performance is not noticeable when comparing August and September with other months.
Since August and September are summed up as a treacherous period, I decided to look at historical two-month performance, going back to 1990. The second table shows the historical performance of the NDX over two months.
Data sources: Nasdaq and EQD research calculations
The combined performance of August and September is slightly positive, but much lower than any other two month period. The best performance for this two month period corresponds to May and June as the lowest best performance. On the flip side, the worst performance over the August to September period was a 30.60% loss in 2001. The percentage of observations where the NDX is higher during that two month period is in the middle compared to other pairs of four other two month periods that result in a profit for the NDX.
So a quick analysis reveals that August through September is not the best time to invest in NDX, but it’s not such an outlier that traders should avoid owning stocks entirely for the next two months. There are several reasons to worry about stocks in 2021, and if you fall into that camp, a collar or short call plus bear put spread can make sense to protect against loss.
First, I calculated a collar with NDX options that expire on the last trading day in August. On Friday, July 30th, NDX closed just below 14960. The August 30th 15000 call was sold for 275 and the August 30th put 14900 was bought for 270, resulting in a balance of 5.00. The payout of this collar, combined with a long NDX position, when the option expires is shown below.
This options spread, combined with owning NDX, has both very limited advantages and disadvantages. Any investor or trader satisfied with their returns in 2021 can consider this a reasonable position for the following month.
If a trader is more bullish or wants more upside exposure, he can always raise the call strike. This would result in less premium being taken than selling the 15000 call. If a call is sold with a higher strike, a put could be bought with a lower strike, or possibly a put with a lower strike could be sold to cover the cost of a long put with a higher strike. This second example does just that.
With NDX right at 14960, a trader could sell the August 30th 15200 call for 171, buy the August 30th 14900 put for 270, and then sell the August 30th 14100 put for 96, at a cost of 3.00 each Spread leads. The result for this spread combined with owning NDX is shown below.
Any move below 14900 down to 14100 in the NDX will be offset by the long put. The spread protects against an NDX loss of 0.40% to 5.75%. As soon as the price level of 14100 is reached, the short put results in the benefit from the long put being offset by the short put. The uptrend is now capped at around 1.5% with gains offset by the short call of 15200.
Granted, there are many reasons to worry about how the stock market will perform over the course of 2021. Relatively poor performance in August and September could contribute to this mindset. If you share these concerns, the options market offers unlimited opportunities to protect yourself from losses.
The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.
