An Improbable Rally

Yo Pit Crazies,


Well, that was a rally!


A nice 2% climb in the S&P 500 from the lows Thursday to the close Friday. And that’s despite …


      • Awful non-farm payroll number, check!
      • Pfizer Inc (PFE) drug patent erosion, check!
      • Too many people at home getting paid, check!
      • All bad news is good news, check!


So, you read this and you might think me cold hearted …


Not the case!


I put this to the Pro Chat and several of the folks said that can’t find anyone to hire. In my small town in Maine, help wanted signs are everywhere. This isn’t to say there isn’t any suffering, but the poor jobs number probably reflects the last stimmy check round. Just look at Dogecoin going to the moon. Let’s hope the labor force fills up a bit real soon.


There is some madness there but stock traders and algos are smart. They know that bad numbers will keep the need for more stimulus and low rates for a longer period of time … 

Up goes the Invesco QQQ Trust Series 1 (Ticker: QQQ) since that is rate sensitive due to the perception of higher future rates damping down growth multiples. What good earnings could not kick higher, lower future interest rates could.


For my trading, that meant VIX really did fall apart with this rally.  It was a concern for sure on Friday and Mark even switched the Option Pit VIX Traffic Light to yellow. I, meanwhile, was eyeing my VTC put positions with big sadness (I will explain below). Yet all was well!


Here we are with a two-week low in VIX and low interest rates on tap for the next few weeks, at least. That is red-red for VIX and the brief dance with Mark’s yellow indicator will be over heading into next week.


His Markness flipped to a yellow light heading into Thursday, but it certainly won’t hold if we get more of the same. VIX is dropping and markets are confident interest rates will stay low for the next month at least, thanks to the jobs report.


That will be tough for iPath B series S&P 500 short term VIX futures ETN (Ticker: VXX) as the futures it holds could be in serious trouble. Note on the table below …


Option Pit Pro Vol ETP Dashboard with Livevol

Note a few things above:


      • VIX is 16.69
      • VIX Jun future is 20.65
      • The premium over the Option Pit Fair Value is 1.85
      • VXX theoretical low with VIX staying 16.69 is $29.87 … Yowsa! VXX is trading at $36.74 right now which is an all-time low.


The trades we are looking at in VXX lean short direction (delta) as crazy as it is. With VXX at an all-time low you would usually expect a bounce. Remember VXX owns futures and those can decay just like options. That makes VXX drop even if VIX does nothing. Weird, huh?


I own VIX and VXX puts that are just in the money and any hedge protection is out of the money. I spelled this out in the VTC on Wednesday. This is a good topic for my Monday note as well. Even if the market goes nowhere for a few weeks, VXX will have a tough time staying where it is


The Rundown

Volatility Edge/Volatility Trading Club:

Vol Edge closed trade No. 85 for a 21% gain. Mark owns VIX May19 15 puts and VIX Jul21 19 puts, which have a great shot at a big payday as explained above.

The VTC closed trade No. 240 for a 50% gain with several open positions leaning very short VIX May via puts.

I tried to open the position below into the close but did not fill and will have to drop down to the 35 strike if the downward momentum keeps up (or switch to a straight VXX put):

Buy 5 VXX May14/21 36 put calendars for .66 buy 1 VXX May21 40 calls for 1.36

Remember, a lot of vol strategies I use are market neutral. That means if SPX or VIX go up or down, the positions still make money. This is a technique you can learn in the Volatility Trading Club and Volatility Edge!


Trading Legion:
The Trading Legion is an intermediate-level education and a long strangle trading vehicle. The goal is to teach students the best times to buy options.

Last week, I added a SPY May21 385/400/415 put fly for 1.70 three times and a SPY May21 421/431 call spread one time. I closed one put fly at 2.45. This leaves me owning two more flies for 2.55 from initial cost. The trade is up a bit now and crazy as it sound the call spread will probably give us the remain put flies for a credit.

I added a SPDR S&P 500 ETF Trust (Ticker: SPY) Iron Condor this week. On Thursday it was down $100 per five-lot. As SPY rallied big FridayI bought an SPY May14 422 call to flatten the delta and we might close early.

Pro Trading Room:
This is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me all during the trading session.

Here’s  update I posted Friday in the OP Pro Trading Room:

    • Sell-to-open Fastly (Ticker: FSLY) May21 30/35 put spreads at .45.
      • I could not fill this Friday either and will just sell the Jun18 35 puts. I am OKsx to take the stock.

Sharp Bets:
Mark Sebastian runs our marquee long option strategy. SB specializes in low-implied volatility calls and puts and managing trade size for a risk-adjusted portfolio of options. 

Walgreens (Ticker: WBA) Jul16 55 calls are up about 25%.

Nike (Ticker: NKE), Nordstrom (Ticker: JWN) and Coca-Cola (Ticker: KO) all moved up big Friday and have a great shot at a win.Once again, longer duration and inexpensive volatility is giving us a shot here.

The Power Income Starting Lineup Portfolio:
Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K-Street knowledge and my option expertise. Look for a new idea on Monday from the Prince of K-Street.

The Power Moves Starting Lineup
Updates to Starting Lineup for the Power Income Portfolio

      • I took delivery on my  2 Palantir (Ticker: PLTR) May07 22.5 puts for this week since I am still covered with the May21 21.5 puts. I’m looking for the tech turnaround to give this a needed boost.
      • Taiwan Semiconductor (Ticker: TSM) dropped hard Friday after a strong open so I bought back the TSM May21 120 calls and sold the May21 123 calls. TSM rallied hard and the calendar was way too passive, meaning I didn’t make enough on a rally. Watch for bigger moves in the Semiconductors next week.

Robinhood Trader:
Option Pit CEO Mark Sebastian uses the Robinhood Radar to find order flow in active names.

Mark opened a long call in Draftkings (Ticker: DKNG) on Friday and owns long puts in Twitter (Ticker: TWTR) and Ford (Ticker: F), with the positions just underwater right now — but hang tight on those.

Like what you’re seeing? Have more questions? Drop a comment below!

To Your Trading Success,



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