2 ITM NASDAQ CONTRACTS

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2 ITM NASDAQ CONTRACTS

I took two ITM trades today and I am going to share my setups and my trades with you. I traded Nasdaq 100 contracts with 60 seconds expiry.Look at my trades.

As the rest of my 60 seconds trades I spent more time to watch and analyze the market about 10-15 minutes and less time to trade. About 5 minutes. This routine seems to work so far for me. I usually trade Forex with binary options but today the time I traded forex pairs were not available for 60 seconds so I traded the Nasdaq.So, it’s time for the screen shot of the day to show you my setups. It was naked trading without indicators I use other times like Ichimoku Kinko Hyo, VSA for volume, RSI etc. I used only price action. Let’s go.

For these trades I used free stock charts software for the “technical analysis” part because my Metatrader software doesn’t have indices, shares and commodities and it has only Forex.

So, let’s see the general picture of the market this hour.Notice our high in this chart, I mean the green candle with the big wick which hit a little bit above the 3000 level and in this spot we have a big rejection. I use the 1min chart for these trades. After the reversal (the big red bar) the price is trying to come back and it makes it but then we have again a rejection and after that the price is moving down. The white horizontal line is first our support and then it acts as aresistance to the red pin bar. This is the “change of polarity strategy” as I descibed it in my previous article.Notice that before the price moved down we had a lower high in the pin bar.The price tried to go up but we had a rejection. A signal that the price will move down. I was waiting for the price to come back to the white horizontal line to take put options and finally it hapenned. I took my trades in the rectangle.You can see two put arrows.

The price comes back to the resistance level, almost hit it and we have a small rejection, I mean the small pin bar candle before I take my trade.Solid ITM.

The reversal bar is strong as you can see in the chart and it actually engulfs the previous green bar. This is an engulfing candlestick pattern so I took another ITM put.

Beginners Guide to Trading Index Options

Credit: Shutterstock photo

What are index options?

Index options are derivative contracts traded on stock indices such as the Nasdaq-100® Index (NDX) or Reduced Value NASDAQ-100 Index (NQX). Index options provide investors broad based exposure to specific sectors and indices with the benefits of diversification while removing single stock risk. Index options are used for a variety of strategies, and provide flexibility with a large selection of expirations and strikes. They are suitable for both retail and institution to hedge portfolio risk, generate options premium and speculate. NDX index options leverage the full value Nasdaq-100 Index while the NQX contracts provide 1/5 the notional exposure to the same flagship index.

ETF vs. Index Options

Many investors find index options simpler to manage compared to stock or ETF options. Index options are European style and cash settled as there are no deliverables for the underlying. This lowers transaction costs by removing the requirement to close out positions at expiration to avoid assignment. NDX Index options also offer both AM (monthly) and PM (Weekly) settlement and can be traded until 4:15PM EST on expiration day. Additionally, under section 1256 of the Tax Code, firms trading certain exchange-traded Broad-Based Index options, such as Nasdaq-100 Index Options (NDX, NQX), may receive favorable tax treatment.

For traders, two major differences that beginners should be aware of are dividends and contract size. ETFs pay dividends and are American style, which adds additional risk of early exercise on a dividend capture. Indices do not pay dividends and are European style, removing this risk. Moreover, ETFs typically trade at a fraction of their corresponding index value, creating smaller notional value contract sizes compared to index options. NDX index option contracts are much larger at $765,455 and NQX, $153,091 at the time of publish for this article.

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Credit Spreads on Index Options

The combination of high index values and large notational contract size are ideal for credit spread traders. Seeking high probability credit vertical spreads with enough option premium to overcome transaction costs requires a large number of strikes on broad based indices, easily found on NDX and NQX index options. Additionally, with cash settlement credit spread traders find managing expirations extremely straightforward.

Speculation – Bet on a significant increase or decline of the Nasdaq-100 Index in the future

Bullish Strategy – Buying Call Options and Bull Call Spreads is a strategy investors use looking to profit from an expected significant rise in the level of the NASDAQ-100 Index (NDX, NQX) over the term of the options contract or to hedge a short market position with limited risk.

Bearish Strategy – Buying Put Options and Bear Put Spreads is a strategy investors use looking to profit from an expected significant decline in the level of the NASDAQ-100 Index (NDX, NQX) over the term of the options contract or to hedge a long market position with limited risk.

Income – Collect option premium based on a mild directional view of the Nasdaq-100 Index in the future

Bullish Strategy – Selling Bull Put Spreads is a strategy investors use looking to profit from an expected mild rise in the level of the NASDAQ-100 Index (NDX, NQX) over the term of the options contract with limited risk.

Bearish Strategy – Selling Bear Call Spreads is a strategy investors use looking to profit from an expected mild decline in the level of the NASDAQ-100 Index (NDX, NQX) over the term of the options contract with limited risk.

Hedging – Protect a portfolio against a market correction while remaining invested

Catastrophic Protection (Cheaper insurance) – Buying OTM Put Options (30 Delta) is a strategy investors use to protect a portfolio from a major market decline in the level of the NASDAQ-100 Index (NDX, NQX)

Comprehensive Protection (Expensive insurance) – Buying ITM Put Options (60 Delta) is a strategy investors use looking to profit from a moderate market decline in the level of the NASDAQ-100 Index (NDX, NQX)

Summary

Index options provides exposure for both retail and institutional investors to broad based indices such as the Nasdaq-100 index for speculation, income and hedging purposes. Cash settled index options provide efficiencies to transaction costs and profits with favorable tax treatment. Moreover, European style options transform busy and intensive expiration Fridays to relative ease by removing assignment risk. Combined with the contract size, investors selling short dated options for income can find enough premium and stability in index options such as the Nasdaq-100 (NDX) index options and Reduced Value Nasdaq-100 (NQX) traditionally not available on ETFs.

The information contained herein has been prepared without regard to any particular investor’s investment objectives, financial situation, and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this material without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions.

Neither the information nor any opinion expressed shall constitute an offer to sell or a solicitation or an offer to buy any securities, commodities or exchange traded products.

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

SPX Options vs. SPY Options

Find out the differences before trading these index options

Andrew Brookes/Getty Images

When using options to invest in the Standard & Poor’s 500 Index, there are two very similar-looking assets from which to choose: You can trade an index (SPX) or an ETF (SPY). These options are ideal for trading because both are very liquid with high trading volume, making it easy to enter into, and exit, a position.

All About the SPX Index

SPX, or the Standard & Poor’s 500 Index, is a stock index based on the 500 largest companies with shares listed for trading on the NYSE or NASDAQ. The term “largest” refers to each firm’s market capitalization or its stock price multiplied by the number of shares it has outstanding.

Unlike the Dow Jones Industrial Average, an index composed of an equal number of shares (adjusted for stock splits) of each of the 30 companies, SPX is a capitalization-weighted index. The weight of a company in the index, or the number of shares represented in the portfolio of stocks, equals the market cap of that company as a percentage of the total market cap of all the companies in the index.

The underlying asset itself does not trade, and it has no shares available to be bought or sold. SPX functions as a theoretical index with a price calculated as if it were a true portfolio with exactly the correct number of shares of each of the 500 stocks.

Because the market capitalization of most stocks changes from day to day, the list of the 500 specific stocks in the index is updated periodically.

The SPX itself may not trade, but both futures contracts and options certainly do.

All About SPY

SPY (nicknamed “spiders”) is an exchange-traded fund (ETF). When buying or selling the shares on an exchange, the transaction price very nearly replicates that of SPX, but it may not be an exact match because the market determines its price just like that of any other security, through an auction.

The investment managers built a portfolio that seeks to provide investment results that mimic the price and yield performance (before expenses) of the S&P 500 Index. Although the portfolio may only approximate that of the SPX index, the results are good enough to suit the huge number of people who trade the shares.

SPY pays a quarterly dividend, which is important because traders with in-the-money (ITM) call options often exercise them so that they can collect the dividend.

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