Buyside Strategies EQD Research

Trading Short-Term Resistance With NDX Options

Jun 10, 2020

By Russell Rhoads,
head of research

The Nasdaq-100 (NDX) continues to lead the charge higher in the U.S. equity markets. On Friday last week, NDX closed at an all-time high and as I write this the index is quoted at even higher levels. Traders love round numbers and there is a huge one on the horizon. The push to 10,000 for NDX has been so rapid that I doubt anyone has had time to get “NDX 10,000” hats printed up. As of Monday, June 8, NDX was approaching 10,000, finishing the day at 9901.

Every option trade should begin with a price outlook for the underlying market, closely followed by a timing aspect around that forecast. The 10,000 level is a figure that many traders are focusing on and also a level many traders have an opinion about. One opinion is that big round number is going to act as a resistance level where the current rally runs out of steam. Based on that very high-level outlook there are a couple of alternatives to trade this view.

There are NDX options expiring everyone Monday, Wednesday, and Friday. On June 8 there were options expiring in two days (June 10) and four days (June 12) that would be appropriate with an opinion that NDX was not going to get through the 10,000 level. At least not for a few days.

Starting with the June 10 options, a bear call spread could be priced out using a variety of strikes. To keep things simple, I use the 10,000 and 10,100 call options. A bearish spread expiring in two days sells the NDX Jun 10 10,000 call at 27.90 points and buys the NDX Jun 10 10,100 call for 10.60 points taking in a net credit of 17.30 points. The payoff diagram below shows various profit or loss levels for each day over the life of the trade.

This trade is based on an outlook that NDX does not breach the 10,000 level. The payoff with one day remaining to expiration shows theoretical values of the trade. For example, with one day left to expiration, if the trade is closed out when NDX hits 10,000 the loss would be around 15.40 points. The more rigid payout line shows the outcome for this bear call spread if the trade is held through expiration on Wednesday. The ultimate gain is equal to the credit of 17.30 points that was taken in when the trade was initiated. The worst-case outcome at expiration occurs with NDX over 10,100 and a loss of 82.70 points.

The same trade could be executed using the options expiring on Friday. In this case the NDX Jun 12 10,000 call would be sold for 53.00 points and the NDX Jun 12 10,100 call would be purchased at 27.00 points resulting in a credit of 26.00 points. A variety of payouts for this trade appear in the diagram below.

This trade was priced on Monday’s close with four days remaining until expiration on Friday June 12.  If the price level of 10,000 is used as a hard stop and the trade was exited when that price level touched, the theoretical loss would be between approximately 14, 12, or eight points with three, two, or one day(s) remaining until June 12 expiration. The best-case outcome is that the 10,000 level holds as NDX resistance and the trade returns the 26.00 points credit. If NDX continues higher the worst-case scenario is a loss of 74.00 points at 10,100 or higher.

Both the two-day and four-day trades matched the outlook of NDX not surpassing a significant resistance level. The two-day trade using the June 10 options had a risk of loss much greater than the worst-case outcome for the four-day trade. Just how confident a trader is in their outlook may dictate which expiration series is chosen for this particular trade.  Finally, if a hard stop of 10,000 is going to be used for the trade that should be given some consideration when choosing which expiration to favor.