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EQD Research: Day Trading With Nasdaq-100 Options

May 1, 2021

By Russell Rhoads,
head of research

Day trades are normally associated with individual stocks or futures contracts. However, with the expansion of expirations available, especially in broad based index options, the opportunity to take a position in an option that expire the same day.

A couple of day trades using NDX options showed up this past Wednesday, April 28. About 30 minutes into the trading day, with the NDX around 13970, a trader came in selling the NDX Apr 28th 14020 Call for 19.55 and purchasing the NDX Apr 28th 14030 Call for 17.25 taking in a credit of 2.30. A few minutes later a very similar trade came in selling the NDX Apr 28th 14020 Call for 18.80 and purchased the NDX Apr 28th 14040 Call for 13.90 taking in a credit of 4.90. Both these trades were opening transactions as the open interest for each contract was lower than the volume traded. The diagram below shows the payoff for both bear call spreads if held through the close the same day as the trades were executed.

 

The two spreads have slightly different risk return profiles, with the 14020 / 14030 risking 7.70 to make 2.30 and the 14020 / 14040 risking 15.10 to make 4.90. Both have the same goal, NDX closing below 14020 the same day they were executed. Cash settlement for index options means that many traders will hold a losing trade into expiration as the defined risk of a vertical spread offers a type of stop loss. For these two trades it is possible that the entity behind the trade was prepared to exit the trade if the Nasdaq-100 rose above a certain price level over the balance of the day when these trades were executed.

To explore how these trades held up over the balance of the day I pulled 5-minute data and created the chart that appears below.  In addition to the price action, I highlight the short strike level of 14020 for both trades.

The trades were timed well and executed early in the day near the time the NDX price topped out. Late in the day, NDX did make a run to the same price levels, but did not move much beyond where it peaked in the morning. By the end of the day NDX settled near the lows with the short strike of 14020 never being threatened. The result was both trades being successfully held through the end of the trading day and all options expiring out of the money.

Short term trading with options, down to less than a day, is a general strategy that had limited opportunities in the past due to expirations only being available to trade once a week or once a month.  The proliferation of expirations over multiple days of the week has created day trading opportunities such as the two trades from Wednesday. We will keep watching block trading activity and try to pick up on more trades like these very short term bear call spreads.