Shawn Howell (Pro Market Advisors)
Taking a quick look across the major indices (S&P 500, Dow Jones Industrials, S&P Midcap, Russell 2000 and the NASDAQ 100) you’ll quickly see that one of them is not like the other, like the children’s game. While all the other indices are at or near 5-year highs; the NASDAQ 100 or NDX is anything but.
A quick look at the top five holdings of the NDX will shed some light on this. AAPL makes up 18% of the index followed by MSFT (7%), GOOG (6%), ORCL (5%), AMZN (3.7%), QCOM (3.6%). With these stocks it’s a mixed bag of uptrend, downtrends and sideways but the two dominant player are in pretty strong downtrends. Since AAPL is the predominant player weighing on the movement of the NDX index, the index is reflecting the fact that AAPL is trading near an 11 month low. I personally don’t want to pick a direction with AAPL. Apple’s executives have managed the stock’s price brilliantly over the past five years and I don’t want to get stuck on the wrong side and the wrong time. Therefore, I’ve decided to play AAPL indirectly using the NDX to soften the effect of anything BIG (upside or downside).
Although AAPL’s movements have a large effect on the NDX at 18% it is still just one of 100 stocks in that index. AAPL is at an 11 month low, the NDX index itself is sitting somewhere in the middle of 5 month range. I don’t feel that this index will be breaking into new highs or new lows anytime soon regardless of the direction AAPL moves in the next month.
Therefore, I’ve decided on an Iron Condor of the NDX itself. I would love to build the wings of my Iron Condor just above the 5 months highs of 2860 and just below the lows of 2500 but the premiums just aren’t there for the Feb options. Instead, I went a little closer to the flame and built the wings using more recent Support and Resistance levels of 2600 and 2800.
Sell the NDX February 2600 strike put
Buy the NDX February 2575 strike put
Sell the NDX February 2800 strike call
Buy the NDX February 2825 strike call for a total credit of $8.80 prices exclude transaction costs.
Risk: $25 credit spreads minus $8.80 = $16.20
The NDX was at the 2742 level when I mocked up these values as they’ve surely changed from the time I wrote this to the time you are reading this.