Spreadin’ the Nazz

• Posted by Adam Warner
• on November 4th, 2009

A trading idea via the imagineers at Options News Network.

The Nasdaq-100 Index (NDX) has led the market’s steady rally, and the contrarian may argue that it will lead us lower as well. The NDX itself has rallied 70%, and some may think it is a bit overdone at this point – this bear call spread is for investors who believe this to be the case. This spread also has limited risk and may allow the trader to collect theta if we begin to move sideways here. Remember this is a cash-settled index, which means you cannot be short the index itself; the options will settle into a cash position.

NDX Credit Spread Trade Details:

The NDX is currently trading at $1,671.82.

Credit Spread/Bear Call Spread–

• Sell the November 1,725 call (out-of-the-money) for $13.30 per contract.
• Buy the November 1,750 call (out-of-the-money) for $7.40 per contract.
• Net credit of $5.90 per spread

Well, this is getting to be a trend. We had similar thoughts in the Striking Price, not to mention I did this sort of trade a bit before reading any of this. The notable difference being the Striking Price recommended OTM put spread buys, whereas this is an OTM call spread sale.

The idea here is to generate a little income against a generally long portfolio. Or at least that was what I was trying to accomplish as i went the call spread over-write route (well some was call spread purchases in SDS, so same diff.). If would seem the next play is to short into rallies with a mental stop if we make new highs again. Short term, the VIX panic and general selling got a bit extreme, but further out it doesn’t feel like smooth sailing any more. So I find the concept of selling these sort of spreads appealing as it does the stop-out for you. Now I’m not sure why using the NDX makes sense, seems QQQQ and the tighter spreads and delivery on settlement makes more sense for most.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus