EQD Research

Traders Looking For A Quiet Thanksgiving Week

Nov 20, 2021

This independent content is made possible by Nasdaq

By Russell Rhoads,
head of research

If my math is correct, Friday Nov. 19 was the forty-ninth new all-time high for the Nasdaq-100 in 2021. That is quite a year for NDX and like many of us, it deserves a holiday-shortened week to rest and recover. A couple of traders think NDX will do just that and they expressed that outlook by executing bear call spreads that expire the Friday after Thanksgiving.  Both trades sold calls with strikes that are just above the 16573 NDX closing level.

The first trade sold the NDX Nov 26 16600 Call and purchased the NDX Nov 26 16625 Call. Based on closing markets this trade would take in a credit of 11.50 and have an outcome that is represented in the diagram below.

The reward if NDX tops out around current levels is equal to the credit received of 11.50. The maximum risk to this trade is 13.50. This 13.50 loss would be the result if NDX continues to make new all-time highs next week and finishes above the 16625 level.

The second trade that caught my eye has a little extra room before breaching the short strike level. This one sold the NDX Nov 26 16610 Call and purchased the NDX Nov 26 16620 Call which would take in a credit of 4.90.

Just like the first bear call spread this trade has a defined risk of loss. In this case, it is a potential loss of 5.10 with NDX over 16620 the day after Thanksgiving. Comparing this to the credit of 4.90, makes the trade almost a 50-50 proposition.

The risk for this both these trades would involve a continuation of the current uptrend for NDX. Counter trend trading is risky especially when putting on a short using some sort of delta one instrument (short ETF or futures). One of the great benefits (possibly the best) of using options is that you can define risk without having to set a stop or keep a close eye on the position. Next week is a week where we all should take a break and spend a little time away from the screens, if you are compelled to be in the markets a defined trade like these bear spreads are a good way to be involved, but not spending time constantly watching the markets.