Too Much of a Good Thing

Andrew Giovinazzi

Yo Pit Crazies,

Yes, we are in a bull market! While yesterday’s selloff was rough it was also overdue. My Easy Trade system assumes a selloff happens so I have to be prepared. I had a way to trade and manage yesterday. More on that later.

SPY 3 Day Chart

Today’s story is about jobs, and lots of them. Everyone should be aware of businesses looking for help. The ADP payroll number was hot. Readers here should not be surprised because I thought the post-COVID market will just be all the people going back to work that lost jobs in 2020. That has been steady since July of that year.

The problem now is competition for dollars and people in a highly stimulated economy. We are in an untested climate since normally the government would pull back spending once job growth started.

Even as I believe we’re in a bull market, the economy is not the stock market, as Mark Sebastian reminded me yesterday in Delta Strike. Stocks can move in two directions, even in a day as the SPDR S&P 500 Trust (Ticker: SPY) chart snap can attest above.

In the Easy Button, I added a strangle in the iPath Series B S&P 500 VIX Futures Short Term ETN (Ticker: VXX).

I’ll break down the VXX trade and why it’s the kind of trade you should be making in this market.

Both Volatility and SPY Moved Yesterday

Volatility is on the bottom graph below, SPY price on top. Notice the anti-correlation. SPY is down, volatility is up – this happens up to 80% of time. That’s a good enough pattern to trade. The VXX strangle, long call and long put, would accelerate in value if volatility went up. I know that because that’s what happens most of the time in a SPY drop.

Vol Man riding the inflection point in SPY

VXX ran hard at the open, and I closed the calls in my strangle. You ask how I knew to call the top? I didn’t. I just wanted an area where I couldn’t lose.

In fact, I closed the calls for a net 8% gain on the position overall. Now I ride the puts to see where they go.

VXX 3 day chart

I got paid 8% to hold the VXX puts to Jul 14 expiration. Another trick is that I know VXX will accelerate hard with Vol this low because the percentage moves in VIX futures are relatively large. That’s what we talk about in the Trading Desk everyday.

We have a Non-Farm Payroll (NFP) number today, which should be hot too. But I know I cannot lose on this trade.