How the NDX Trade is Holding Up?

by Jay Pestrichelli on June 1st, 2012

I’ve had a few calls this morning already to check on the monthly OTM (out-of-the-money) credit spread trade. For those of you that are not aware of this trade, it comprised of deep out of the money puts spreads with a high probability of success to generate small amounts of income. Although it has a high probability of success, it comes with a very high amount of capital at risk and if left unmonitored in extreme markets can cause major portfolio problems.

Now that the disclaimer is out of the way, here’s is how the trade started out. The trade was established 2 weeks ago on May 18th as NDX 2175/2125 credit put spread for $2 with a probability of success at 97%. At the time the NDX traded at 2490. In other words, there was a 97% chance that the index wouldn’t drop 315 (12.7%) points down to the 2175 level before June 15th.

The two weeks that followed have been volatile with the average daily move of over 36 points or 1.5% and a volatility index over 25%, but essentially the index traded sideways. This morning the NDX is down to the level where the trade was entered around 2480, but since two weeks of time decay have occurred the spread has dropped in value to 0.65; that’s a 67% gain ($2 to $0.67) so far and the probability of success is at 99% even after this terrible jobs report. In other words, the trade is still looking good.

The exit for the trade is still at a spread price of $3.50 to $4, which at this point looks unlikely. However, this trade always requires a vigilant eye, so here are the estimated levels for the rest of the month that might cause an exit. The chart shows plenty of cushion left in the trade and as each day passes, the level of exit gets farther away. All good things for this trade.


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