EQD Research: Elevated Nasdaq-100 Volatility Results In A Huge Buffer For One Credit Spread

Last Thursday, September 17, a relatively large Nasdaq-100 credit spread expiring on Friday, Sept. 25 hit the tape in the middle of the day. NDX was quoted at 10,966.80 when a trader sold just under 3500 NDX Sept. 25 9900 puts at 28.38 and purchased the same number of NDX Sept. 25 9850 puts for 26.13. The net result is a bull-put spread initiated with a credit of 2.25 points per spread. If this trade is held through Friday, Sept. 25 expiration, the payoff matches the diagram below.

This trade is safe if the Nasdaq-100 does not lose over 1000 points between when the trade was initiated and option expiration on Sept. 25. The buffer of safety for this trade was about 9.7% when the trade was initiated. It turns out based on the NDX close of 10,980.22 on Monday, Sept. 21, that buffer is still close to 9.7%, but now with only four trading days left to option expiration.

To get a bit more perspective on how much needs to go wrong for this trade to fail, I went back and explored NDX price action in 2020. The last time NDX was under 10,000 was the last day of June, which is the first day on the chart below. Despite being under 10,000 on June 30, NDX closed well above that round number and has not looked back since.

As I write this there are four more trading days left until this bull put spread expires, but so far there has been little danger of the ever important 9900 price level being violated. Even on Monday, when NDX was at the lows of the day (down 2.4% from Friday’s close), the short strike was over 750 points lower. Any more weakness in the NDX may begin to fray some nerves as the risk reward, 47.75 point loss versus 2.25 point gain, is a bit daunting, but as noted above, lots would need to go wrong in just a few short days. It is unlikely, but then again, anything is possible in 2020, so I’ll be keeping an eye on the 9900 and 9850 NDX puts that expire at the end of this week in the event of a big NDX move to the downside.