Nasdaq, Inc. (NDAQ) stock is near a 3-month low. If, indeed, the market has hit a bottom, it makes sense to sell short out-of-the-money (OTM) NDAQ put options. That way, an investor can set a lower buy-in and get paid while waiting.
NDAQ is at $82.75 in midday trading on Friday, April 10. That's near its 6-month $79.01 low (Feb. 12). So, why not set a one-month lower buy-in and get paid? This article will show how.
I discussed this play a month ago in a Barchart article: “If the Worst Is Over, NASDAQ Inc Stock May Be a Bargain - What's the Best NDAQ Play Now?”, March 10.
Rolling Over a Short-Put Contract
At the time, NDAQ was at $88.21, and I discussed shorting the $82.50 put option contract expiring April 17, a little over a month away. The premium received was $1.65, for a 2.0% yield (i.e., $1.65/$82.50).
Today, that put premium is lower at $1.00, although it's now at-the-money (ATM). There is a risk that the investor's collateral (i.e., $8,250 per put contract) could get assigned to buy 100 shares.
So, to avoid this, the investor can roll the contract over to next month. Let's see how.
First, note that the investor will have to enter an order to “Buy to Close” the existing April 17 $82.50 put contract. That will cost $1.00 or $100 per put contract already shorted.
Next, the May 15 expiry NDAQ option chain shows that the $77.50 put contract has a midpoint premium of $1.38. That provides a cash-secured put option seller a 1.78% yield (i.e., $1.38/$77.50).
Moreover, this contract price is 6% lower than today's price and below the prior NDAQ low. There are pros and cons to this play.
Considering Alternatives
Cons. Note that this rollover play provides just a $38 net credit for the next month on a $7,750 investment, i.e., a net 0.49% yield. Moreover, it may cost extra commissions to execute.
Pros. However, there is just a low chance that the account will be assigned to buy shares at $77.50, as the delta ratio is just 0.24. That implies less than a quarter chance that NDAQ will drop to $77.50.
Moreover, an existing investor at the $82.50 strike price for April expiry might not have to buy shares at that price if NDAQ stays over $82.50 by then.
As a result, some investors might consider shorting the $80.00 strike price put. Note that the midpoint is $1.95. That provides almost a 2.5% yield over the next month:
$195 income received / $8,000 invested in collateral = 0.024375 = 2.4375% yield over one month
Moreover, on a net basis, the investor receives $95 (i.e., after paying $100 to buy back the April 17 expiry short put play. As a result, the net yield is still high:
$95/$8,000 = 0.011875 = 1.188% yield
The bottom line is that shorting out-of-the-money (OTM) NDAQ puts offers an attractive way to set a lower buy-in and also get paid. That is what attracts this play to value investors.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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