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Case Study: Trading A Balance-Breakout Failure In The Nasdaq 100

Unpacking how Physik Invest traded derivatives tied to the Nasdaq 100 stock index, after the failed April 2021 breakout.

What Happened: On April 29, 2021, market participants attempted to move the Nasdaq 100 stock index from balance, an area of recent price acceptance, above a developing ledge, or flattened area on the composite volume profile.

Further, participants failed to find acceptance beyond the balance area, given the Nasdaq 100’s move back into the prior range. As a result, odds favored (1) sideways or (2) lower trade, as low as the balance area low (BAL) near $13,700.00.

Adding, a weak reaction by heavily-weighted index constituents to blowout earnings, as well as poor structure left behind prior price discovery, among other factors, such as the will to raise the Capital Gains Tax, suggested an increased potential to trade below the $13,700.00 BAL, into prior poor structures, or low volume areas (LVNodes), that ought to offer little-to-no support.

In response, the following sequence analysis unpacks how Physik Invest traded options tied to both the cash-settled Nasdaq 100 (INDEX: NDX) and Nasdaq 100 (CME: /NQ) future, leading up to the May 12, 2021 swing low. 

Note: Click here to view all transactions.

Sequence 1: On April 29, 2021, Physik Invest applied the balance-break and gap scenarios, monitoring for acceptance (i.e., more than 1-hour of trade) outside the balance area. 

To preface, gaps ought to fill quickly. 

Should they not, that’s a signal of weakness; leaving value behind on a gap-fill or failing to fill a gap (i.e., remaining outside of the prior session’s range) is a go-with indicator. 

Auctioning and spending at least 1-hour of trade back in the prior range suggests a lack of conviction.

After a confirmed balance-breakout failure, Physik Invest bought the following structures for a $203.00 debit. At this point, if all legs were to remain out of the money (i.e., expire worthless) by May 21, 2021, the maximum loss would have been $203.00, approximately 1/5 of a standard risk unit, or the debit risked in a typical position.

  • 13500+1/13300-2/13100+1 NDX long put ratio spread
  • 14100+3/14110-6/14140+3 NDX short call ratio spread
  • 14400-1 /NQ short call

By 5/10/2021, the aforementioned position was closed for a $1,855.00 credit, an 813.80% return on the initial debit outlay.

The above put-side structure was initiated against the $13,300 high volume area, also a prior balance area boundary. The reason being, a structurally sound market will build on past areas of high volume. Should the market trend for long periods of time, it will lack sound structure (identified as a low volume area which denotes directional conviction and ought to offer support on any test). If participants were to auction and find acceptance into areas of prior low volume, then future discovery ought to be volatile and quick as participants look to areas of high volume for favorable entry or exit.

Summary: After a failed balance-breakout setup presented itself, Physik Invest financed long put-side structures targeting a test of $13,300, with short-call exposure, risking ⅕ of a standard risk unit in debit, over a timeframe of one month.

In total, the sequence of trades net a $1,621.71 profit after commissions and fees.

The above strategies were employed in accordance with Physik Invest’s core edge: the trade of ratioed, multi-leg strategies that combine short and long positions to reduce risk and increase returns.

Yes, in hindsight, one could have opted for static short exposure (e.g., selling stock to open a position). However, the risks tied to such strategies are immense in a regime characterized by increased volatility and uncertainty.

By leveraging the dynamics of time and volatility, through complex spreads, unwanted directional risks were reduced.

Reflection: Hindsight is 20/20.

Though the entry was perfectly timed, the exit was not; 1-day prior to expiry, the 13500/13300/13100 ratio spread – which was removed for a $21.11 credit – priced at nearly $90.00. 

The correct move would have been to initiate the position with up to four 13500/13300/13100 ratio spreads. Thereafter, as prices moved lower, the position would have been pared down enough to at least cover the cost of any remaining spreads.

Those remaining spreads would have been kept on as so-called “lottery tickets.”