The Nasdaq-100 (NDX) had a difficult week last week losing 5.77%. Big volatility brings the talking heads, many of whom are talking their book. The bulls will claim this is a good chance to buy stocks on weakness and NDX down about 28% on the year, while the bears will say another leg down is a certainty. Either way, longer-term views seem to come out during short-term volatility. We decided to look for trades last week using Nasdaq-100 index options that have a long-term outlook. When we say long-term, we mean over a year, which in the option world is an eternity.
The first trade hit the tape late Friday with NDX around 11,840. Over the course of a few minutes and in a few small lots a trader came into the market selling 20 NDX Dec. 15, 2023 8000 Puts for 283.93 who then purchased 20 NDX Dec. 15, 2023 20200 Calls at 50.19. The result is a credit of 233.74 and a payout during the 2023 holiday season that appears below.
This risk reversal appears bullish on the diagram, but once we check out the spread strike prices, this is probably more neutral than bullish. In fact, we question buying the out of the money call. As nice as a 70% gain would be over the next 14 months, the possibility is a bit remote at best. We dug a bit when we say the possibility is remote, the first step is to reach the all-time NDX high of 16573.34 (a gain of 40% from current levels).
Another interesting trade from last week using NDX options with a long-term focus also utilized the Dec. 15, 2023 contracts. With NDX at 12144 a trader sold the NDX Dec. 15, 2023 7000 Put for 170.00 and purchased the NDX Dec. 15, 2023 6000 Put for 96.00, taking in a credit of 74.00.
This trade is in good shape as long as NDX does not breach the 7000 level between now and the middle of December of next year. At the time of execution, the 7000 strike was 42.4% lower than NDX. Much like the first trade, this is more about NDX not falling too much versus expecting a quick rise. The downside is 42.4% lower at trade time, but NDX is currently about 28.4% off the all-time high. Using this figure, this trade is at risk if NDX is just over 70% lower than the all-time high. A 70% drop for NDX off the all-time high is not unprecedented as in October 2002 NDX was more than 80% off the all-time high hit in March 2000. If you wonder what that was all about, I suggest googling “Internet Bubble.”
Finally, another trade, with a neutral outlook over a long time-period was executed mid-day on Tuesday as stocks dropped in reaction to the CPI number. With NDX at 12210, a trader initiated a short strangle selling the Dec. 20, 2024 10500 Puts for 903.77 and selling the NDX Dec. 20, 2024 15500 Calls for 975.88, taking in a net credit of 1879.65. The payout at expiration in December 2024 appears below.
We highlight a few key levels on this trade as we assume the trader that put it on is more interested in making the maximum profit. On the downside, the 10500 strike is 14% lower than where NDX was when the trade was executed. The upside 15500 strike is 29.6% higher than NDX at trade time. The break-even levels are the other significant levels associated with this trade. At expiration, the trade would result in a loss if the NDX is 29.4% lower and on the upside losses kick in if NDX rallies 42.3%. Another trade with a very wide berth, but an awful lot can happen in the world over the next two years, just look back at how much has changed in the last two years.
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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