Yo Pit Crazies,
Last week I went live and said the SPDR S&P 500 ETF Trust (SPY) could move 3% in a couple of days.
It did, and it's still moving.
I want to walk you through the trade I built for it and what to watch in the short term to see if the storm kicks up again.
On Tuesday, the CBOE Volatility Index (VIX) closed at 14.21. That's a 30-day closing low, and really a six-month closing low. Most of the time that's a bullish sign for stocks (a low VIX means traders aren't paying up for protection).
Unless you've got a Perfect Storm brewing in the background. You see, the storm only dissipated. It didn't disappear.
On Wednesday, oil caught a bid through the United States Oil Fund (USO) and snapped a five-day slide. Yields spiked right along with it. The 10-year Treasury yield jumped 16 basis points (0.16 percentage points) to 5.12%, its highest level in 19 years.
The trigger was a September business survey showing U.S. activity growing at its fastest pace in more than five years, with inflation pressure in both manufacturing and services. A sloppy auction of five-year notes piled on. Traders now see roughly a 70% chance the Fed hikes again in October, up from 55% the day before.
So 5.12% rocked the boat, but so far it hasn't sunk the S.S. SPY. The S&P 500 slipped 0.75 percent Wednesday and the VIX jumped almost 7%. That came two days after the S&P 500's best day since early August, and SPY's been swinging like crazy these last five trading days.
SPY 6–Day Chart
The same storm that pushed my trade into the green over the Fed meeting perked back up. I thought it'd be useful to walk you through exactly what I did.
The $6.30 Ticket
The whole point of this type of trade:
- Enter on a Wednesday for max VIX exposure
- Don't care where the market goes
- Close what pays, when it starts to pay
I bought a SPY call, a SPY put spread (a cheaper bet on a drop that caps how much you can make) and a VIX put. The SPY legs were for the move. The VIX put was for the vol crush (the drop in option prices once a big event passes and the fear drains out).
On the day of the trade, I took the money on the SPY put spread for a 29 percent gain. I didn't get the peak price, but I had to grab the bounce off the bottom. Then I watched the rally Thursday and Friday and rode the SPY call up.
I set a stop (an order that sells automatically once price hits a set level) that locked in a profit on the whole trade, and sure enough it tripped. Some of my students held into Monday, and those calls traded over $5, a 100 percent gain on that leg. I kept the VIX puts for the vol crush and closed them Wednesday for a small gain once the storm started brewing again.
The trade cost $6.30 and the top prices to close added up to more than $10. My 20 contracts made me $1,500. That's one way to ride a Perfect Storm.
The good news: I get to do it again this week.
Tap this link to come join me.
Hopefully this was helpful,
Andrew Giovinazzi