Skip to main content

See also:

Trading options for income: NDX settlement strangles

NDX settlement strangles
NDX settlement strangles

In our quest to understand trading options for income, we often wonder if trading short strangles on the settlement of the weekly NDX would be profitable. Unlike the SPX weekly, which PM settles on Friday, the NDX weekly AM settles on Friday (having expired on the prior day, Thursday). The NDX is the index for the Nasdaq Composite.

A short Strangle is an undefined risk option strategy in which an OTM (out of the money) Call option is sold while concurrently selling an OTM Put option, resulting in premium received. The max gain is the premium; the max loss cannot be determined which is why this is called an undefined risk trade. A one lot Strangle requires just 2 options to be sold (1 option per leg).

To determine the viability of trading the NDX at expiration, Tasty Trade conducted a test using one year of weekly NDX data (54 total trades). The criteria for the test: enter positions at the expiration of each weekly using a 1 SD (standard deviation) Strangle with a POP (probability of profit) of approximately 68%. The settlement value, which is determined after all stocks within the index post in the morning, is listed late Friday by the CBOE (Chicago Board Options Exchange).

The results: the P&L was a strong $6,681 with percent winners of 87%. The biggest loss was -$1,450; the average credit received $2.75 (or $275 per trade).

In conclusion, this strategy appears to have merit, although it would have been better to expand the test beyond one year and at other risk levels of SD (1.5 and 2). The high percent winners, exceeding the expected 68%, indicates that the volatility of Friday openings is somewhat muted. The RUT was also tested; however, the weekly option chains at expiration lacked sufficient depth resulting in less than optimal results.

If you would like to learn more about options, and how to generate consistent weekly income trading options, go to Options Annex.