Short-dated options get a lot of attention these days, but that does not mean longer dated traditional expirations are not being utilized as they have in the past. This write-up highlights a longer-term option trade on January 16, as we came across an option spread trade that benefits from a Nadaq-100 (NDX) sell off between now and the third Friday in June.
With NDX at 16,800 a trader purchased 160 NDX Jun 21 15925 Puts for 386.20 and sold 240 NDX Jun 21 14000 Puts for 127.50 each. The result is a cost of 389.90 for each long 2 15925, short 3 14000 puts. The payoff diagram below shows the expected results on the third Friday of each month (old school standard expiration) starting with February and ending with June, when the trade expires.
At expiration, the two break-even levels for this trade are at 15729.90, a drop of about 6.4% and 10539.90 which is just over 37% to the downside. For all the time frames displayed on the payoff diagram, the farther downside break-even is basically the same at about 37%. However, the closer break-even varies greatly depending on the time left to expiration so we want to highlight those differences.
At February expiration the break-even level is about 16720, a drop of only 0.5%. Break-even at March expiration is 16696 or down about 0.7%, April’s level is 16553 or down 1.8% and finally break-even on the third Friday of May is about 16300 or down 3%.
We can only interpret what we see on the tape, but a strong assumption is that this trade would be monetized (exited) if NDX experiences a significant down move between now and June expiration. There also may be a point where this trade is exited if expiration is approaching and the long 15925 put is still out of the money. For example, if NDX is at 16808 (where it was when the trade was executed) at May expiration, the trade may be exited for an approximate loss of 220 points, a painful outcome, but 170 points better than the maximum loss at June expiration of 389.90.
For now, we watch, which in our case means the trade is on our watch list in case profits or losses are taken between now and June 21.
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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