One (or two maybe) trader guarded against a drop in the Nasdaq-100 (NDX) over the course of last week through using the Nasdaq-100 Micro Index (XND) options that expired on Friday July 28. Both trades are collars, selling an out-of-the-money (OTM) call and purchasing an OTM put.
Before jumping into the trades, I have included a 15-minute chart of XND and highlighted when the various entry and exit transactions occurred.
The first trade was executed on Friday, July 21 around lunchtime (Trade #1). With XND at 155.19, a trader sold 100 XND Jul 28 157 Calls for 1.04 and purchased the XND Jul 28 153 Puts for 0.90, scoring a credit of 0.14 and an expiration payoff that appears below.
The dark blue line represents the option only trade and the lighter blue payoff line represents the complete collar including long exposure to the Nasdaq-100. This collar guards against a loss of 1.32% or more but sacrifices any gain above 1.26%. Also, there is a small credit upon execution, so if held to expiration, the option trade offers up a small return.
The trader behind this collar took off half of it late Thursday as stocks took a dip. Specifically, they covered the short 157 Call for 0.08, less than the original credit. It appears they held the 153 Put through expiration for a net profit of 0.06.
A second collar hit the tape on Tuesday July 25, the day before last week’s FOMC announcement. At the time of the second trade XND was at 156.01. This collar sold 100 XND Jul 28 158 Calls for 0.71 and paid 0.71 for the XND Jul 28 154 Put resulting in no credit or debit (Trade #2). The payoff at expiration appears below in the same manner as the first payoff diagram.
This trade gives up performance over a 1.28% gain but also is protected against a drop of 1.28%. Neither option was ever in the money after the trade was initiated. Thursday afternoon, as stocks started to move lower, this collar was closed out at no credit or debit, paying 0.16 to cover the short call and selling the long put at 0.16 as well.
The goal for today’s blog was to follow these two collars to expiration. However, this trader may have returned to the market last Friday as another 100 lot XND collar hit the tape (Trade #3). This trade uses the August 4 options, selling the XND Aug 4 159 Call for 0.81 and buying the XND Aug 4 156 Put for 0.81, resulting in no credit or debit. The payoff if held through Friday August 4 appears below.
XND was trading at 157.39 when this trade was executed. This places the short call strike closer to the market than the long put. The upside is limited to just over 1%, while losses are guarded against if there is a move over 1.52% to the downside. We plan on keeping an eye on these two contracts as well as any other XND block trades that use this cheap method of hedging.
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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