Not since the Summer Olympics of 1996 has the world focused so much on the state of Georgia. Next Tuesday, January 5, there will be a runoff election for two Senate seats held in Georgia. At stake is control of the Senate and the possibility that Democrats will control both Congress and the White House after the inauguration of Joe Biden on Wednesday January 20. The business world is focused on this date and this definitely is showing up in volatility expectations as indicated by NDX options expiring just after the election. The chart below shows the implied volatility for at the money NDX put options expiring each Monday, Wednesday, and Friday during the first two weeks of January.
January 4 is at a pretty decent discount to the other expirations, which may be attributed to the holiday weekend taking some time value out of the options. Despite that the January 6 and January 8 expirations are pretty elevated compared to the following week. Typically, at expiration is extended in time we will see higher option implied volatility, however, the first week of 2021 will be anything but typical.
I went searching for trades focused on the January 6 expiration and it didn’t take me too long to find one taking advantage of the elevated January 6 implied volatility. With NDX at 12860 there was a size seller of the NDX Jan 6 12300 Puts for 30.18 who then paid 23.43 for the Jan 6 12200 Puts taking in a net credit of 6.75. The outcome, based on the January 6 NDX close appears below.
The dollar risk reward is a bit much for some traders with a potential reward equal to the 6.75 credit versus a potential maximum loss of 93.25. However, as long as NDX is not below 12300, a drop of 4.35%, the trade will turn out fine. It may be that this trader thinks there will be a bit of a year-end rally to increase the range between where NDX is quoted and the short 12300 put strike level. That would explain putting on the trade a week in advance of the option expiration date and time will tell if being early is a benefit for this trade.
The option markets are definitely pointing to a volatile first week of 2021 and one trader is using that outlook to put on a neutral to bullish position expiring just after the expected election results. The election outcome is truly a toss-up and I am not going to even try to predict that outcome. However, I’m sure more short term option trades focusing on both the January 6 and January 8 expiration dates will pop up leading up to the January 5 runoff election date.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Russell Rhoads, PhD, CFA
Russell Rhoads, Phd, CFA is a highly regarded strategist, educator, and consultant – among other things he is perhaps best known as the author of Trading VIX Derivatives, the textbook in the space.
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