EQD Research: Nasdaq-100 Traders Taking Advantage Of Summer Volatility

July is typically a quiet time of year for the stock market. It is an earnings month, but the period leading up to those announcements often results in traders wishing they had taken some time off. However, this year, we got a bit of increased equity volatility. Although minor, with the Nasdaq-100 (NDX) losing over 2% in three-day period ending this past Monday July 19, the timing seemed to catch traders off guard. Despite the mini-sell off ending Monday, over the five trade day period from July 15 to July 21 NDX managed to cover a range of almost 500 points, but the outcome was almost no change from the open on July 15 to the close on July 21 (chart below).

Data Source: Bloomberg

The increased volatility sent me looking at block trades in the NDX, specifically vertical spreads that managed to choose good entry spots. The first trade of interest was a bull put spread executed late in the trading day on Friday July 16 with NDX near 14680.  A trader sold about 1700 NDX Jul 21^st 14550 puts and purchased the same number of NDX Jul 21^st 14525 puts taking in a credit of about 6.00. The payoff with significant price points appears below.

This trade worked out well, but the ride was anything but smooth. Early Monday NDX gapped lower and it most of the day below the 14525 long strike price in this spread. However, by the end of the day NDX closed at 14549, just a point under the short strike in this bullish spread. Over the last two days of the life for this spread NDX trended higher closing well above the short strike price and at a price where the full credit received when the trade was initiated turning into a profit.

A bearish trade also managed to hit the tape using NDX options that expired on July 21. On Tuesday, in the middle of the trading day with NDX at 14720, there was a seller of 1800 NDX Jul 21^st 14880 calls who also purchased the Jul 21^st 14900 calls resulting in a credit of 1.30. The payout below shows how this trade turned out along with some relevant NDX price levels.

This trade worked out with the full credit of 1.30 turning into a profit at expiration. Although NDX was trending higher, the short 14880 strike price was never breached. Although I am certain the trader behind this bearish spread was watching the markets closely as the trend was pushing NDX higher.

Volatility creates opportunity and in the case of the recent NDX price action, both bullish and bearish short-term traders were able to profit using NDX options. The bullish trade was a bit more stressful than the bearish one, but it was probably easier to stick with the trade since the worst-case scenario was defined by the structure of a vertical spread.