Shorting The Nasdaq 100

By John Manley DMS

Several readers have asked me to post an example of shorting the Nasdaq 100 with a spread. The example below was created with real market prices on the morning of October 15th.

Hedged Short Spread - NDX (Nasdaq 100 index)

The Play: Put Diagonal - NDX (November / December)

STO (sell to open) 2 Nov 2100 Puts
BTO (buy to open) 2 Dec 2050 Puts

Hold time: 16 to 24 days (see model)

Greeks at inception;

Delta + 4.53 (almost neutral initially)
Gamma - .17
Theta (time value) + 42 - working in our favour.
Vega (volatility) + 172.54 - Play will benefit from a rise in volatility which generally happens when the index falls.

The Rationale

Refering back to part one of this series, my analysis told me the NDX is due for a pull-back. With that outlook, I also wanted an upside hedge. I would also be looking for about a 2% rise in volatility with a down-turn. The NDX Put Diagonal fit the bill (see model).

Current Price NDX: 2181

Upper breakeven on Nov 08: 2260 - approximately 4 % upside hedge
Lower breakeven on Nov 08: 2068 - approximately 6% downside breakeven WITHOUT any adjustments.

Risk Management

Although this is a neutral to bearish play, our greatest risk at inception is to the downside. My analysis told me I was looking for a pull-back, but that pull-back is in the context of an existing uptrend, which should lend some support. IF the index begins to fall hard and fast I have a few options.

1. Shut the spread down at a pre-determined loss point.
2. Morph the put diagonal spread into double calendars to lower the downside breakeven.
3. Manage delta exposure through direct put buying.

Adjustment strategies would be determined by date, price and volatility. We will run this model and update as time moves on.

Thanks and continued success with your trading!

The strategy highlighted above is for educational purposes only. It is not a recommendation to engage in any option strategy featured in this site. Please discuss any investment strategies you are considering with a qualified financial advisor