I was reviewing some old orders this weekend that hadn’t hit yet and came back to NDAQ which was one of 2009 Stock Picks. It has made a good run up from its November lows, but appeared to be hitting resistance at Friday’s close. Support appears to be around $20 and rising with a triangle forming soon. I’m still bullish on it longer term, so I chose to sell a credit vertical put spread. In other words, I sold a put and bought a put at the same expiration date, but with the puts I sold at a higher strike.
While NDAQ was trading at $24.02 my single limit order for both trades hit and I received a net credit of $0.80. I bought five NDAQ March 20 Puts (NQDOD) for $1.02 and paid $523.74. At the same time I sold five NDAQ March 22.5 Puts (NQDOX) for $1.82 and paid $906.24. Since I entered this as one spread order I was only charged one overall commission, but still paid the small commission for each contract I sold. My net credit is $382.50 after commissions.
I decided to go for the hedged position rather than just sell naked puts since the market conditions are so volatile these days. $382.50 is the most I can gain on this trade and $867.50 is the most I can lose. To lose the full amount NDAQ has to close below $20.00. $21.74 is break even. I’d be open to taking an option assignment above $20 and write covered calls if NDAQ doesn’t recover quickly. If NDAQ goes below $20 it will make me have to reconsider my options at the time.