A Mix & Match Vol Trade

Hey Traders,

You may have noticed that volatility has been doing some interesting things lately …

The wild August futures contango …

The VIX spiking 50% in a matter of five days …

Before falling back to earth in a rather dramatic fashion …

And honestly, guys, with the macro events coming up, I wouldn’t expect to see it settle down anytime soon.

But by now you know I’m something of a “vol” guy.

So instead of putting on the brakes, up-and-down volatility is when I step on the gas!

And a great thing about volatility is sometimes you get to be extra creative …

Like this trade I recently played (and won!) in my Volatility Edge program.

If you want to start playing volatility like this, you should check out my Volatility Edge trading program. I’ll show you what I’m trading, and teach you the “volatility” ropes! I’m offering a special price and bonus, but the doors are shutting today!

One of the reasons I like trading volatility is it gives me multiple ways to play the market, and multiple ways to play market events – which was the goal when I initiated this trade just ahead of the mega-cap earnings peak a few weeks ago.

Headed into the biggest earnings week of the year, I noticed the Invesco QQQ Trust (Ticker: QQQ) – which tracks the Nasdaq 100 – was surprisingly cheap.

“But wait,” you might be thinking. “I thought we were trading volatility here, not the Nasdaq!”

Don’t worry, I’m getting to that.

Now, headed into a week where over 50% of the Nasdaq is due to report earnings, you might expect implied volatility (IV) of an ETF that tracks tech stocks to be on the higher side of the spectrum.

Well, in this case, you’d be wrong.

I know. Weird, right?

QQQ’s IV was suspiciously cheap, making pre-mega-cap-earnings QQQ options a downright bargain!

Confirming this, the Nasdaq 100 Volatility Index (Ticker: VOLQ) which tracks the volatility of the Nasdaq 100 (Ticker: NDX) was at about a six-month low. 

So we’ve got low volatility in an index that is almost certainly going to react one way or another to mega-cap earnings.

This opens up a lot of doors.

If I thought mega-caps were headed for a post-earnings rally, I could have bought some calls on QQQ …

However, I figured that strong earnings were already priced into the market, and a post-earnings tumble was more likely, barring any “blow the doors off!” reports.

(One of the great things about playing earnings via an ETF rather than trying to play individual tickers is I’m able to speculate on the general earnings reaction. One outlier  isn’t going to blow my whole strategy.)

I decided to open a put spread on QQQ, purchasing the at-the-money August 18 368-strike puts, and selling the QQQ 348-strike put for a total debit of around $4.00 – a great price on a trade that’s got a 20-point spread on an ETF trading at $368!

Chart courtesy StockCharts

So long as QQQ hit below $364 ahead of August expiration, I’d be in the money!

Now, here’s where I really bring some volatility into it.

Being long in the 368-strike puts, I was really hoping to see a decent size drop out of QQQ.

But let’s say the opposite happened, and QQQ took off higher.

Well, when the market rallies, what usually happens to volatility?

It falls.

That’s why the S&P 500 (Ticker: SPX) and CBOE Volatility Index (Ticker: VIX) divergence is one of the indicators I use in my Option Pit VIX Traffic Light.

When the SPX rallies, the VIX is usually falling.

When the VIX is rallying, the SPX usually takes a dip.

Generally, if they’re both heading in the same direction, I can assume sooner or later (usually sooner) one of them will have to give out.

Likewise, if QQQ jumped on great earnings, I would expect to see volatility get beat down a bit.

Therefore … how about pairing this QQQ trade with some VIX puts?

That’s exactly what I did, buying ten August 18 VIX 18-strike puts for $0.80.

If QQQ tanks, my QQQ trade wins.

If QQQ rallies, my VIX trade wins!

And these trades had so much time left in them – about a month – there was plenty of time for either (or both) of these predictions to play out.

The VIX puts were exceptionally cheap, and I was actually expecting to see volatility pull back. Though my Option Pit VIX Light indicator was telling me traders were expecting near-term turbulence, I figured the VIX would have time to pull back ahead of expiration.

In this case, the day after I opened this trade, QQQ sunk like a rock, hitting an intraday low of $360!

Chart courtesy StockCharts


I closed out my QQQ spread at $6.60 – a 65% win overnight!

Now what about those VIX puts?

Just because I played them in conjunction with QQQ doesn’t mean I had to close them out at the same time.

With the VIX sitting around 20, it wouldn’t have made sense for me to lock in a loss by selling these.

So I held them.

And held them …

And held them.

And then … the VIX tumbled, just ahead of August VIX futures expiration:

Chart courtesy StockCharts

I closed these puts out in three parts, selling half of my ten contracts for $1.20, three for $1.50, and the final two for $1.70 – that’s a huge win on puts I initially only paid $0.80 for!

So with this trade, I was able to hedge each of these positions against each other … and with a little bit of patience, I was able to profit on both halves!

How often do you see that?!

My Volatility Edge traders were able to play this right alongside me, especially since I initiated it during our live Volatility Edge weekly meeting.  

We’ve got plenty of market-moving events I’m keeping an eye on, and hoping to play just like this one.

Today’s the last day you can claim your spot at a discount, and receive five bonus weeks of “Griff’s Picks!” to help you spot and play additional macro trades in the weeks ahead.

If you’re ready, claim your spot by clicking here.

Your Only Option,

Mark Sebastian

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