Diving Into A One-Day Targeted NDX Put Butterfly


Each weekend I cover what I found interesting in the equity derivatives and volatility space the previous week for EQDerviatives. One of the trades I wrote up this past weekend involved putting on a put butterfly just minutes before the close last Friday that was targeting a downside move between 1.0% and 3.6%. It just slightly missed the mark.

Late Friday (5/6) a trader came into the NDX option market with about 2 minutes left in the trading day predicting where NDX should finish on Monday (5/9). With NDX at 12,693.50 a trader bought 5 NDX May 9th 12600 Puts for 108.32, sold 10 NDX May 9th 12400 Puts for 46.56, and then finished out a put butterfly buying 5 of the NDX May 9th 12200 Puts for 18.30. The result is a cost of 33.50 per spread and a payoff at expiration that appears below.

Put butterfly

Since NDX closed below the lowest strike price in the spread (12200), if this trade was held to expiration it would have resulted in a loss of 33.50. However, all three options in this spread traded multiples of the size of this trade on Monday. Also, NDX spent the majority of the day between the two strike prices (chart below) which leads me to believe profits were taken at some point.

NDX 5-minute chart

The break-even at expiration levels for this trade (12233.50 & 12566.50) are on the chart above. Note NDX spent the majority of the day between these two key levels giving the trader behind this trade plenty of chances to take profits.

Finally, I created a profit / loss chart using the option prices over the course of Monday’s trading. I hope that at some point during the trading day the trader behind this spread decided to take profits.

NDX May 9

Note at any point during the trading day up until about the last 30 minutes this trade was in the green or offering a change to exit with a profit. Just because NDX closed outside the break-even points does not mean this trade turned into a loss, it could just be this trader thought Monday would be a bearish day and NDX would at minimum move through the area of profitability offering a chance to exit with a profit.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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