Buyside Strategies EQD Research Volatility

Short-Term Bullish NDX Option Trades The Norm Despite Nasdaq-100 Making New Highs

Jul 27, 2020

By Russell Rhoads,
head of research

The Nasdaq-100 has been the leader of the pack among broad-based stock indices in 2020. The NDX held up better than other benchmarks during the first half of the year and has gained well over 50% from the March 20 low of 6994.29. Despite this tremendous performance, or maybe due to the momentum, I still come across very bullish trades when looking at the block trading activity for NDX options.

One example hit the tape Wednesday, July 22. While NDX was at 10885, less than 100 points from the all-time closing high, a fairly aggressive spread was executed using three different standard NDX options expiring on Aug. 17 at the market open. The specific trade sold the NDX August 9300 put at USD43.00, bought the August 11000 call for USD284.70, and finally sold the NDX August 12000 call at USD26.20. The spread trade was done in a 200 lot at a net cost of USD215.50. The payoff diagram below shows the profit or loss of this trade if held through Aug. 17 expiration.

I use the term aggressive regarding this trade because a break-even outcome involves a rise of 3% from where NDX was quoted when the trade was executed. If NDX marches higher to 12000, a gain of about 10.25%, then the profit at expiration is capped at USD784.85. This is the best-case scenario for this trade. Finally, the downside is the cost of the trade until the short 9300 put strike is hit. At that point there is further risk to the trade, but these extra losses do not kick in until NDX drops 14.5%.

Still bullish, but at the other end of the aggressiveness spectrum, was a bull put spread executed using the non-standard NDX options on the market close on Friday July 24. With NDX quoted around 10860 a trader came in executing bull put spread. Specifically, this trader sold 100 NDX Jul. 24 10250 puts for USD5.04 and then purchased 100 of the NDX Jul. 24 10050 puts for USD1.88 resulting in a net credit of USD3.16 per spread. The outcome if held through the market close on July 24 appears in the payout diagram below.

As long as the NDX does not drop below 10250 by July 24 this trade reaps a profit of USD3.16, which would require a two-day drop of 5.6%. In 2020, this sort of move has been more of the norm than in most years, but it is still unlikely based on recent price action. The worst-case scenario for this trade is a loss of USD196.84 which would require a 7.5% move to the downside.

The Nasdaq-100 continues to flirt with making more all-time highs following the excess volatility that hit equity markets in the first few months of 2020. NDX option activity continues to reflect bullishness or at least a lack of bearishness from option traders.