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HIPOS Weekly Update: New Trade as Volatility Returns After Holiday Weekend

Following yesterday’s post regarding successful expiration, another trade presented itself as the market experienced one of the worst days of the year. The NASDAQ 100 (NDX) was especially hit hard with bellwethers like Apple, Facebook, Microsoft and Alphabet (Google) all showing signs of weakness and pushed the volatility index up by as much as 17%

Historically speaking, the market is reflecting quite a bit of fear right now. Times like this provide opportunities for unique trades like the one entered yesterday (Monday the 19th). For example, at the time of entry the NDX trade entered was more than 18% out-of-the money with an expiration of December 21st. The fact that the market is willing to pay a premium for a position this far away is a reflection of strong short-term fear. The last time a trade this far out-of-the-money was selected was back in August 2015; and the HiPOS long-timers recall what was going on back then.

We will be back on the blog next week with an update on the position.

Now for the particulars:

  • Index: Nasdaq 100 Index
  • Position type: Vertical spread
  • Short strike: 5500
  • Long strike: 5400
  • Risk (prob. ITM): <0.50% at time of entry
  • Targeted return: 1.5% gross
  • Distance OTM: 18.5% at time of entry
  • Expiration: December 21st or 31 calendar days to expiration at time of entry