Two XND Collars With Different Structures and Time Frames
On Friday December 15, we came across two trades that are guarding against a drop in NDX, using Nasdaq-100 Micro Index (XND) options. As a reminder, XND options are 1/100th the size of NDX. For example, if NDX is quoted at 16,600, the XND price will be 166.00.
The first trade is a collar, executed with XND at 165.94, sold 100 of the Dec 22nd 167 Calls at 0.76 and purchased 100 of the Dec 22nd 165 Puts for 0.71. The result is a credit of 0.05 and a payoff on the December 22 close that appears below.
Both the option spread outcome and spread combined with a Nasdaq-100 portfolio are depicted above. This collar is tight allowing for only 0.64% of upside or a loss of 0.57% over this five-day period. A safe assumption is the entity behind this trade wants to lock in profits with the index up over 50% year to date.
A second trade, which has an extra option leg and has a 3-month outlook was executed with XND at 166.24. This trade sells the XND Mar 15th 177 Call for 1.79, purchases the XND Mar 15th 162 Put for 3.11 and completes the trade by selling the Mar 15th 147 Put for 0.87 resulting in a net cost of 0.45.
Again, the payoff diagram has two different lines, one showing the option part and the other combined with long NDX/XND exposure. Right off the bat a bit of upside performance is sacrificed due to the cost of this trade, but in percentage terms it is only about 0.3% based on the premium versus XND at the time of the trade. This trade allows for portfolio loss of 2.82% if XND is between down 2.55% and 11.57% on March 15. Above 177, or 6.47% higher than XND at execution, gains are capped at 6.20%. Finally, there is extra potential downside if XND is below 147 at expiration.
So, the plan now is to track how these two trades work out, one will be easy with expiration just five trading days out, but a bit more vigilance will be needed. A similar size trade reversing any of the three legs of the March spread and we will ponder if that’s the entity behind this trade and what the thought process may be.