Yo Pit Crazies,
Stocks have caught fire.
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Register now at no-cost. (And make sure you’re there to receive a free Big Money trade.)
Now that I got you hot and bothered, 16 VIX is the Line of Death, the Maginot Line, the Level That Shall Not Be Named for 2021.
There is a reason VIX won’t go down.
Skew Is the Reason
All option contracts have a degree of skew. From a purely operational point of view, skew is the difference between at-the-money implied volatility and out-of-the-money implied volatility.
The Black-Scholes Model wants a constant volatility to expiration.
Wait — what’s the Black-Scholes Model?
It’s an option-pricing model that generates an option’s theoretical value by factoring in:
- The underlying price
- The option’s strike price
- The amount of time left until the option expires
- The current level of interest rates
- Forward volatility (implied vol) of the underlying security
As I said, Black-Scholes wants a constant volatility to expiration. The problem is, the market does not provide that type of volatility in the short term. So, the vol markets’ answer is to adjust volatility per strike.
I could go into the major statistics, but what you need to know is that larger skew prices are short-term effects and tend to flatten out, IVs per strike, as expirations get very long term. In other words, skew flattens out long term.
In our Edge Hunter butterfly sheets, we have a SKEW INDICATOR that measures ATM IV to the 25 delta IV.
Except for the Friday, Monday and Wednesday expiries, these vol skews are in the upper 85% of the standard deviation. That means with VIX this high, these OTM are very high.
That is why the VIX will stay above 16. If I see the blue go away here, things are changing.
These skews are persistent lately, COVID, etc, and they don’t go away. When they do, look out for Zone 1 (9-12 range) again!
Capitol Gains w/ Frank Gregory
Option Pit DC and Wall Street insider 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 options expertise.
- Our Exxon Mobil Inc. (Ticker: XOM) trade is back up 21% and I am letting it run here. Looking for XOM to break out to $60. Goal is another 50%.
Pro Trading Room:
The Pro Room is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me during the entire trading session.
The Pro Room sentiment is still bearish VIX/VXX/UVXY.
- Ken A going yard again in the screenshot below:
Each week, Option Pit CEO Mark Sebastian looks for low-volatility, mid-term duration call buying and put buying opportunities.
- Mark rang up an MGM Inc. (Ticker: MGM) calls for 50% gains as he pieces out the wins.
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.
- I added some retail in Dollar Tree Inc. (Ticker: DLTR), which is bouncing nicely.
Volatility Edge is run by Mark and uses the proprietary Option Pit VIX Light indicator to guide volatility trading. The Vol Trade Club is run by me (AG), and employs a long strangle strategy that seeks to use VIX future decay to pay for upside VIX, VXX and UVXY options.
The Option Pit VIX Light will most likely turn red with a VIX run back to 16.
- VTC Trade No. 263 is up 10% as of now with both sides still open.
To Your Trading Success,