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Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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What are your options - Nasdaq 100 - Selling premium!
Koen Hoorelbeke
Investment and Options Strategist
Summary: In recent times, the Nasdaq, a tech-focused index, has found itself in choppy waters. As the earnings season progresses, we're seeing a mixed set of results, causing the market to react unfavorably. But herein lies an opportunity. The heightened uncertainty has led to increased volatility, pushing option premiums to alluring levels. For savvy investors/traders, this presents a prime chance: to capitalize on these rich premiums by selling them, effectively transforming market turmoil into a profit-making venture.
What are your options - Nasdaq 100 - Sell premium!
In recent times, the Nasdaq, a tech-focused index, has found itself in choppy waters. As the earnings season progresses, we're seeing a mixed set of results, causing the market to react unfavorably. But herein lies an opportunity. The heightened uncertainty has led to increased volatility, pushing option premiums to alluring levels. For savvy investors/traders, this presents a prime chance: to capitalize on these rich premiums by selling them, effectively transforming market turmoil into a profit-making venture.
Whether you're optimistic about a bullish upturn, anticipate the market to remain range-bound, or foresee a further downturn, this article has something for you. We'll introduce you to a range of defined-risk strategies, each tailored to harness the elevated implied volatility currently associated with the Nasdaq index. Now is the opportune moment to benefit from selling premium. Read on to discover how to strategically navigate these challenging market conditions.
Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.
Strategies
Bullish outlook
Broken wing put butterfly on Nasdaq 100
1. Decoding the trade configuration
The trade setup comprises the following legs:
- Buy: 1x put option at a 13,525 strike.
- Sell: 2x put options at a 13,500 strike.
- Buy: 1x put option at a 13,450 strike.
2. Risk and reward dynamics
- Maximum risk: -$2,120.00
- Maximum profit: $2,880.00
- Breakeven point: 13,471.20
- Net premium: Credit of $380.00 USD.
3. Delving into the strategy
Advantages:
- Enhanced profit potential: The BWBF offers more profitability on the downside due to its design, making it a moderately bearish strategy.
- Defined risk: The strategy caps the maximum risk to the difference between the long and short puts, minus the net premium received.
Drawbacks:
- Loss horizon: The primary risk with this strategy is if the index closes below 13,450 at expiration. However, contrary to a normal butterfly-strategy with symmetric legs, there's no loss if the index rises above 13,525; the strategy retains the full premium credit.
4. Final thoughts
Broken Wing Butterflies (BWBFs) are intriguing for those who lean slightly bearish but want the added safety of capped risk. It's a strategy blending the benefits of premium decay and directional bias. For traders keeping an eye on the Nasdaq 100 or any other volatile index, the Broken Wing Put Butterfly could be an elegant addition to the toolkit.
Important remark: even though the current price of the Nasdaq is well above the upper-leg of this strategy (at time of writing the Nasdaq quotes at 14272 (well above 13525), and the maximum profit is at 13500, you might and could consider this a bearish strategy. Personally I like to look at this as a bullish strategy with a bearish insurance, because if the price goes up, you get to keep the initial credit. The premium received at opening in relation to the margin requirement and the short duration returns a positive yield. And when things don't go as foreseen, you have a "insurance" cushion which could yield you the max profit at expiration.
Neutral outlook
Iron condor on Nasdaq 100 index
1. Trade Configuration
The given Iron Condor strategy involves the following legs:
- Buy: 1x Put option with a 13,475 strike.
- Sell: 1x Put option with a 13,500 strike.
- Sell: 1x Call option with a 14,925 strike.
- Buy: 1x Call option with a 14,950 strike.
All options have the same expiry on 17-Nov-2023.
2. Risk and reward metrics
- Maximum risk: $1,480.00
- Maximum profit: $1,020.00
- Breakeven points: 13,489.80 and 14,935.20
- Net premium: Credit of $10.20 USD or $1,020.00 for the entire position.
3. Strategic implications
Advantages:
- High Probability of Profit: The Iron Condor profits when the underlying index remains within the range defined by the breakeven points. This range is wide, giving a significant buffer for price fluctuations.
- Defined Risk: The maximum loss is capped, determined by the difference between the strikes of each vertical spread minus the net premium received.
Drawbacks:
- Loss Potential: Should the index move significantly outside the range, the trade can result in a maximum loss. This occurs if the Nasdaq 100 closes below 13,475 or above 14,950 at expiration.
- Limited Profit Potential: The maximum profit is limited to the net premium received, which can be seen as a trade-off for the higher probability of success.
4. Current Market Conditions
Implied Volatility (IV) Rank: 47.15%. The current IV rank suggests that the options are relatively more expensive than they have been historically. This can be advantageous for selling strategies like the Iron Condor.
5. Final Thoughts
Given the relatively high IV rank, this Iron Condor can be seen as a strategic move to capitalize on the elevated option premiums. The wide range between the breakeven points provides a cushion against moderate price movements in the Nasdaq 100. However, as with all options strategies, it's crucial to monitor the position and be prepared to adjust if the market makes unexpected moves.
Bearish outlook
Call Broken Wing Butterfly on the Nasdaq 100 Index (NDX)
Risk and reward metrics
- Net Premium: Credit of $500.00 USD.
- Margin Impact: 1,757.02 EUR.
- Max Risk: -$2,000.00.
- Max Profit: $3,000.00.
- Breakeven: 15,030.00.
Trade Components:
- Buy 1x Call at a 14975 strike.
- Sell 2x Calls at a 15000 strike.
- Buy 1x Call at a 15050 strike.
Analysis:
1. Risk/Reward Profile:
- Your maximum risk is capped at -$2,000. This is the most you can lose, and it would occur if the index rises above the highest strike price (15050) or falls below the lowest strike price (14975).
- Your maximum profit of $3,000 would be achieved if the index settles right at the 15000 strike at expiration. This is because both of the sold calls would expire worthless, and you'd keep the entire net premium received, plus any intrinsic value from the 14975 call.
- You'll break even if the index is remains below 15,030.00 at expiration.
2. Strategy Bias:
This strategy profits from a moderate rise in the underlying index, up to the strike of the sold calls. Beyond that, profit tapers off but remains until the index hits the highest bought call strike. Given this, you have a bullish to neutral bias on the Nasdaq 100 Index until expiration. This bullish bias is indeed the case if you target the max profit, which is currently well above the Nasdaq 100 index-price (at the time of writing 14265).
However, personally I see this as a bearish strategy with a bullish "insurance" cushion. Given the fact that you received a nice credit when opening the position, if the price continues downwards you get to keep the received credit ($500), which is already a nice yield relative to the required margin. If the price goes up (contrary to your view), it first needs to pass the sweet spot at 15000, which could yield you the maximum profit (near expiration), before turning into the max loss if it rises further.
3. Profit Zones:
- Below 14975: The loss is capped at the net premium received ($500) minus the difference in the strike prices of the bought calls (75 points or $750), which totals -$250.
- Between 14975 and 15000: Profit rises linearly, reaching its peak at 15000.
- Between 15000 and 15050: Profit starts to decrease but remains positive.
- Above 15050: The maximum loss of -$2000 is realized, which is due to the net cost of establishing the position (including the initial credit) and the increase in intrinsic value of the highest strike call.
4. Other Considerations:
- Liquidity: Ensure that the options have good liquidity to avoid significant bid-ask spreads which can erode profits.
- Expiry: This strategy will achieve maximum profitability near expiration if the index is near the 15000 strike. Monitor the position as the expiration date approaches.
- Adjustments: If the index moves significantly before expiration, you may want to adjust your position to lock in profits or minimize potential losses.
5. Closing Thoughts:
This broken wing butterfly is an interesting strategy if you're moderately bullish on the Nasdaq 100 Index. It offers a decent potential reward for a defined risk. However, like all options strategies, it's essential to monitor the position and be prepared to adjust if the market moves against you.
Conclusion
In light of the strategies outlined above, it's evident that the heightened volatility in the market provides a fertile ground for options traders. As the Nasdaq grapples with turbulence, the silver lining emerges in the form of lucrative option premiums. These premiums, reflecting the uncertainty of the times, become the bedrock of our strategies, allowing us to transform potential risk into tangible rewards.
The strategies presented - whether bullish, neutral, or bearish - serve as tools in our arsenal, geared to capture value from the increased premiums. Not only do they offer a defined-risk approach, ensuring we never bite off more than we can chew, but they also position us to benefit from the swings of the market, be they up, down, or sideways.
In conclusion, as the adage goes, "In every crisis, there's opportunity." For options traders, this truism manifests in the form of high premiums during tumultuous times. By employing the strategies discussed, one can navigate the rough seas of the Nasdaq, anchoring their portfolio with the weight of well-calculated decisions. In these times, it's not just about braving the storm, but about setting sail and harnessing its power for our gain. So, as you ponder your next move, remember: the stormier the market, the richer the premium. And therein lies our golden ticket.
Happy trading!
Options are complex, high-risk products and require knowledge, investment experience and, in many applications, high risk acceptance. We recommend that before you invest in options, you inform yourself well about the operation and risks. In Saxo Bank's Terms of Use you will find more information on this in the Important Information Options, Futures, Margin and Deficit Procedure. You can also consult the Essential Information Document of the option you want to invest in on Saxo Bank's website.
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