EQD Research

NDX Option Traders Taking Advantage Of Last Week’s Volatility

Sep 28, 2021

By Russell Rhoads,
head of research

Last week the US equity markets started out under pressure, but managed to rebound by week’s end. When excess volatility hits the marketplace I like to go digging through block trades, and this exercise in the NDX arena yielded several short-term option trades that benefitted from the brief sell-off and subsequent recovery.  The chart below is a reminder of the price action along with numbers showing when each of the three trades I will discuss in this article were executed.

Data Source: Bloomberg

Each trade had a defined risk and reward, which when getting long in the face of a weak market helps with what can be a gut wrenching experience. The first trade is a great example of the defined losses allowing a trader to stick out a trade that is not going their way.  On Monday the 20th, early in the trading day with NDX at 14952 there was a seller of the NDX Sep 20th 14960 Put at 54.40 who then purchased the NDX Sep 20th 14950 Put for 50.10 resulting in a credit of 4.30 and a payout at the end of the trading day illustrated below.

Data Sources: Bloomberg & EQDerivatives

NDX held up for about an hour and then dipped in the afternoon putting in a low of 14821.  A late day rally saved this trade and checking on volume it does appear this trader stuck with it through the day. Knowing that the maximum loss was 5.70 probably allowed this trader to avoid panicking out of the trade as NDX moved lower.

The second trade was executed early in the trading day on Tuesday the 21st, using options that expired on Wednesday the 22nd.  With NDX at 15072 a trader bought the Sep NDX 22nd 15060 Call for 106.27 and sold the NDX Sep 22nd 15070 Call for 100.64 resulting in a cost of 5.63 and a payout on the close the following day matching the diagram below.

Data Sources: Bloomberg & EQDerivatives

NDX did breach the lower strike for a brief period, but this trade was mostly in the clear during its short life as NDX moved up and finished the following day at 15177, a very safe level relative to the option strike prices. It is worth noting that this bullish spread used calls, both of which were in the money at expiration. A great thing about index options is cash settlement allows traders to not be concerned about assignment or exercise at expiration resulting in a position in an underlying security.

Trade 3 is an interesting vertical spread, but not one for the faint of heart. NDX option volatility was elevated in conjunction with the market moves last week and this allowed a trader the ability to sell a very far out of the money put spread on Thursday the 23rd.  With NDX at 15259 a trader sold the NDX Sep 24th 14800 Puts for 3.90 and bought the NDX Sep 24th 14700 Puts for 2.80 netting a credit of 1.10. The risk to this trade shows up below, with a potential loss of 98.90 a spread. A risk versus reward that is not for everyone.

Data Sources: Bloomberg & EQDerivatives

Again, this is an observation and not a recommendation, but there was a 3% downside cushion between NDX and the short put strike. This trade did not result in too much stress as the low between execution and expiration was only a point below where NDX was quoted at trade execution. The result was small profit upon Friday’s close.

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