The Nasdaq-100 (NDX) has been a market leader in 2023 and has recently been hovering around 2023 highs. The chart below shows that the 12800 level is putting up pretty formidable resistance. Based on this very basic analysis we went looking for NDX option trades that appear to be based on NDX not breaking through this level.
Data Source: Barchart.com
Counter trend trading, or in this case shorting NDX when the index is in an uptrend, can be a dangerous approach. Specifically, a pure short position using an ETF or futures may result in substantial losses, even if a stop order is in place. However, using options a trader can define their losses when taking the other side of a trend and know the worst case scenario.
We started out looking through the tape from March 21, when NDX was near the resistance level of 12800. Late in the trading day, with NDX at 12741 a trader sold the NDX Mar 24 12800 Call for 123.88 and purchased the NDX Mar 24 12900 Call for 79.90 resulting in a credit of 43.98 and a payoff on the close on March 24 that appears below.
Data Source: Bloomberg
This was a three-day trade and if held to expiration worked out well with the March 24 close coming in at 12767, below the short call strike in this bear call spread. However, the high on March 22 was over the long strike of 12900 and the March 23 high was very close to the long strike of 12900. A trader selling futures based on this outlook may have been sweating it out. But the defined outcome of this spread offers a bit of comfort when the worst-case scenario is known, and the trade is going against you.
On March 22 another trader used a bearish spread structure to speculate that NDX was not going to start a new leg to the upside. At least on the following trading day. Mid-afternoon, with NDX at 12831 a trader sold the NDX Mar 23 12900 Call for 50.00 and purchased the NDX Mar 23 12925 Call for 40.20 taking in a net credit of 9.80. The risk to this trade, if NDX moved to new highs and closed over 12925, was a loss of 15.20.
Data Source: Bloomberg
This trade on March 22 was well-timed as NDX dropped into the close finishing the day at 12567. The following day, the high for March 23 clocked in at 12900.10 – placing this trade 0.10 in the money at the worst moment.
On March 23, as NDX was at 12900 (the high of the day) one trader sold the NDX Mar 23 12950 Call for 22.81 and purchased the NDX Mar 23 13075 Call for 2.50 for a net credit of 20.31 and a payoff on the close that afternoon that appears below.
Data Source: Bloomberg
The risk of 104.69 versus a gain of 20.31 is not the kind of risk / reward many option traders are willing to take on. However, this trader did time high of the day within minutes and it is tough to argue with success.
Finally, on Monday March 27, less than an hour into the trading day, there was a buyer of the NDX Mar 31st 12820 Puts for 138.05 who sold the same number of NDX Mar 31st 12760 Puts for 114.70. This trade has a net cost of 23.35 and a potential reward (if NDX finishes Friday below 12760) of 36.65.
The jury is still out, but as of midday Wednesday, NDX has not spent too much time over 12800, near the breakeven point for this trade. We do find this trade structure attractive as the index was slightly above the breakeven level at execution. The profit and loss is close to the change in the market with a target of 12760 to the downside and a loss capped at 12820. Friday’s close will tell us if this trade was as smart as so many others that have been taking advantage of NDX struggling to push above current levels.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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