THEUS equity markets started under pressure last week, but managed to rebound over the weekend. When excessive volatility hits the market, I like to dig into block trades, and this exercise in the NDX arena has resulted in several short term option trades that have benefited from the brief sell off and rally that followed. The chart below is a reminder of the price action as well as numbers showing when each of the three trades I will be talking about in this article has been executed.

Data source: Bloomberg

Every trade had a defined risk and reward, which when long in a weak market contributes to what can be a heartbreaking experience. The first trade is a great example of defined losses allowing a trader to hold a trade that doesn’t go his way. Monday 20e, at the start of the trading day with NDX at 14952, there was a seller of NDX on September 20e 14960 Put at 54.40 who then bought the NDX on September 20e 14950 Put for 50.10 resulting in a credit of 4.30 and a payout at the end of the trading day shown below.

Bull put spread

Data sources: Bloomberg and EQDerivatives

NDX held for about an hour then dipped in the afternoon to hit a low of 14821. A late afternoon rally saved this trade and by checking the volume it looks like this trader stuck with him the whole time. the day. Knowing that the maximum loss was 5.70 probably helped this trader to avoid panicking due to NDX under pressure.

The second transaction was executed at the start of the trading day on Tuesday 21st, using options that expired on Wednesday 22sd. With NDX at 15072, a trader bought on Sep NDX 22sd 15060 Call for 106.27 and NDX sale on September 22sd 15070 Call for 100.64 resulting in cost of 5.63 and next day close payment corresponding to diagram below.

Bull call spread

Data sources: Bloomberg and EQDerivatives

NDX broke through the lowest exercise threshold for a brief period, but this trade was mostly in the clear during its short lifespan as NDX rose and finished the next day at 15177, a very safe level by compared to the exercise prices of the options. It should be noted that this bullish spread used call options, both of which were in the money at expiration. One of the advantages of index options is that cash settlement allows traders not to worry about the sell-out or exercise upon expiration, resulting in a position in an underlying security.

Trade 3 is an interesting vertical spread, but not for the faint of heart. The volatility of NDX options was high in conjunction with market movements last week, which allowed a trader to sell a sell spread far away from silver on Thursday 23.rd. With NDX at 15259, a trader sold NDX on September 24e 14,800 Puts for 3.90 and bought the NDX on September 24e 14,700 Puts for 2.80 offsetting a credit of 1.10. The risk for this trade is shown below, with a potential loss of 98.90 per spread. A risk for reward that is not for everyone.

Bull put spread

Data sources: Bloomberg and EQDerivatives

Again, this is an observation, not a recommendation, but there was a 3% downward cushion between NDX and short selling. This trade did not cause too much stress as the low between execution and expiration was only a point lower than where NDX was quoted when the trade was executed. The result was a small profit until the close on Friday.

Excessive market volatility creates trading opportunities and these opportunities can be exploited with many different market instruments. Listed index options offer a chance to define risk during times of turmoil like last week and what appears to be a continuation of volatility this week.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


About The Author

Related Posts