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EQD Research: XND Option Trades For The Long Term And Short Term

Jun 26, 2021

By Russell Rhoads,
head of research

The launch of Mini-Nasdaq 100 options is several weeks behind us and traders continue to find uses for the smaller size Nasdaq-100 contracts. For those unaware, XND is 1/100th of the NDX, so the index options based on XND offer exposure to the Nasdaq-100 in a size that is more reasonable for many traders.

First, there was a good size trader opened and closed last week using the XND options expiring on Friday June 25. On Wednesday morning, with XND at 143.09 a trader came into the market and sold 100 of the XND Jun 25th 143.50 Calls for 0.50 each. Late Friday, just before expiration, this trade was closed out at a cost 0.10 with XND just under the short strike at 143.38 resulting in a profit of 0.40.

An opening trade from Friday consists of a seller of the XND Jul 16th 142 put for 1.43 who then purchased the XND Jul 16th 136 put at 0.51 resulting in a credit of 0.92. XND was at 143.60 at the time. If held to expiration the payoff matches the diagram below.

 

This bull put spread has a cushion on 1.1% for the short strike with the worst-case scenario placing XND below 136 at July expiration with a drop of 9.5% or more. The loss in this case would be 5.08 a spread, substantial when compared to the credit of 0.92, but a lot has to go wrong in a short period of time for this trader to realize the maximum loss.

Finally, also on Friday, there was a seller of 40 of the XND Dec 17th 138 puts at 6.20.  XND was at 143.35 when this trade was executed.  If held through the third Friday of December the payout looks like the diagram below.

I am generally not a fan of naked put sales, but in this case, recent history justifies this trade. As long as XND is not down by 3.7% or more through December the trade profit is equal to the 6.20 credit received when initiating the trade. Break even for this trade is down 8.1% from where XND was when the trade was executed. Checking on recent history, the worst second half for the Nasdaq-100 was a loss of just over 10% in 2018. This move would result in a loss of about 2.80 per spread. Admittedly, the NDX did lose about 35% in the second half of 2008 so there is a bit of tail risk associated with this trade.

There are plenty of other XND trade examples to choose from and there will be more as volume continues to increase and more expirations become available and of course trades of interest will be highlighted in this space.