By Derek Moore
As markets continued their heightened level of volatility Monday, the ZEGA trading team found a new HIPOS short put spread position. For this iteration, we turn to the Nasdaq 100 Index or NDX. One of the benefits of higher volatility levels is the ability to find positions that meet all our stringent rules for entry directly after our previous position expired at a full profit.
This NDX trade expiration is on the shorter side ending June 21st. After the close Monday there will only be 13 trading days left as the position has an A.M. settlement on expiration date. For those that might be asking about the settlement, a couple quick things. Index options, depending on whether they are normal monthly or weeklies, either expire at the end of the trading day or on expiration morning.
When they expire on expiration morning with an A.M. settlement the final full day of trading is the Thursday session. Then on the Friday morning the index goes through what is called an opening rotation to formulate the settlement price. Maybe on another update we can explore this a bit more. For now I’ll link to the CBOE Exchange for those that are inclined.
A few quick things before the particulars. We mentioned this trade is on the shorter end of our normal days to expiration period. This means that changes in implied volatility and time decay will take effect quicker than you normally might notice. We chose the Nasdaq 100 Index because compared to the other indices it gave us the best risk to reward ratios within defined time periods. While HiPOS does not make directional trades based on market outlooks, it is notable that the Nasdaq has already sold off more relative to the other indexes. CNBC this morning noted it is in correction territory having dropped greater than 10% from its recent highs.
Now for the Particulars:
- Index: Nasdaq 100 Index
- Position type: Short Vertical Put Spread
- Short strike: 6050
- Long strike: 6000
- Risk (prob. ITM): <1% at time of entry
- Targeted return: ≈1%
- Distance OTM: 14% at time of entry
- Expiration: June 21st or 18 calendar days