The $500K Bet on a Space Stock Floor

Hey Traders,


Wall Street is chock-full of eccentric visionaries, including two who are battling in the race for space tourism: Richard Branson and Elon Musk.


Branson heads up Virgin Galactic (Ticker: SPCE) and Musk is the notoriously blunt-smoking head of Tesla (Ticker: TSLA) and SpaceX.


After dropping nearly 18% in March, SPCE stock went on to lose another roughly 28% in April, and is testing year-to-date lows.


TSLA stock, on the other hand, is well off its February peak, but not nearly as significantly as SPCE.


And while Tesla has been attracting attention ahead of Elon Musk’s upcoming “Saturday Night Live” hosting gig …


Virgin Galactic stock has been attracting what appears to be institutional investors betting on a floor for SPCE on the charts.


So today, let’s dive into the big-money order flow that caught my eye yesterday …

Big-Money Trader Expects the SPCE Bleeding to Stop


SPCE shares peaked north of $60 in February, but have since given up about two-thirds of that to flirt with the round-number $20 level.


As a result, the stock’s 14-day Relative Strength Index (RSI) is just under 33 — on the cusp of “oversold” territory (generally considered a reading under 30).


SPCE daily chart w/ 14-day RSI – courtesy of StockCharts


Perhaps that oversold reading is why SPCE on Tuesday attracted a massive option trade betting on short-term support.


Specifically, it looks like the trader may have sold to open a little more than 7,500 contracts of the 17-strike put expiring on Friday, May 21, for 67 cents apiece, or $67 (since each option controls 100 shares).


SPCE option trade on May 4, 2021 – courtesy of Trade-Alert


For all the new kids out there, let me break this down even further:


When you BUY a put to open, you’re usually betting the stock will fall beneath the strike within the option’s lifetime.


But when you SELL a put to open, you’re taking the opposite side of the buyer’s trade.


That means you expect the underlying stock to stay above that sold strike — $17, in this case — through the option’s lifetime.


In the case of SPCE, the big-money seller will be able to retain most or all of the initial net credit received to open the trade — $67 a contract, or $503,572 ($67 x number of contracts).


Yes, as long as SPCE stock doesn’t breach $17 — territory not explored since October — in the next couple weeks, this institutional option seller can pocket about HALF A MILL.


However, put selling certainly comes with heavy risk, which would increase the steeper SPCE should fall beneath $17 by the close on May 21 (expiration day).


Even more risky? Selling options ahead of a known event — which could be a volatility catalyst — like earnings, which Virgin Galactic is slated to report on May 10.


But again, perhaps the seller thinks the recent SPCE sell-off is overdone, and that the bleeding will stop soon … or at least north of $17.


Either way, with SPCE attracting big-league money in the option pit, I’ll be keeping an eye on this one to see if it also appears on my Robinhood Trader scanner, which could put it on my short list to trade.


Enjoy the rest of your week and good luck out there!


Your Only Option,



Mark Sebastian

This Sector Heats Up in May

Hey Traders,


If you’ve been in the stock game for a while, you’ve likely heard the famous expression, “Sell in May and go away.


In my experience (which is 20 years’ worth this summer, if you can believe that!), this saying is overdone, lacks nuance, and frankly, it’s just bad advice!


Sure, at one point in time, that seasonal adage carried water, so to speak … 


There were valid reasons for many traders to scrub their portfolios before summertime, and not circle back until fall.


However, things have changed on Wall Street — we’re in the midst of a market like we’ve never seen before.


I don’t just mean the changes we’ve seen since the pandemic, either, which has fueled an influx of fresh retail-trading meat over the past year …


Sell in May” turned stale long before the Robinhood army emerged.


So today, I’ll tell you why you should ignore this trading trope that just won’t die — and I’ll even show you there are plenty of opportunities to profit this month … IF you know where to look.


“Summer” is a Noun


There are various theories about the origin of the “Sell in May and go away” saying, but among the most common is this:


Once upon a time on Wall Street, the big-baller traders would unload stocks before taking their families to summer by the water somewhere. 


They didn’t want to spend a lengthy vacation having to worry about their portfolios, so they tried to put a bow on their trading before hitting the road — and collectively, this occasionally translated into a summer slump for stocks.


Hence, why Wall Street was told to sell in May, before the seasonal dip.


But these days, how many people do you know who “summer” anywhere? 


I mean, where I come from, “summer” is a noun, not a verb.


It’s safe to say we’re no longer in the Seven Year Itch era, with trains filled with brokers headed to Long Island or Cape Cod, still wearing wool suits despite the temperature …


After all, with the advent of air-conditioning, a 30th-floor loft in Manhattan and a subway ride to the financial district don’t feel quite as stifling in the July humidity.


Not to mention, the actual process of trading these days is much less taxing.


These days, speculating with stocks and options can be done from the comfort of our own homes, or even from our phones, as opposed to in person on the floor … 


All that considered, one can conclude that selling in May and going away is gone with the wind. 


This Sector Heats Up in May


As I said earlier, there are ALWAYS opportunities to make money playing stocks and options, if you’re nimble enough and know where to look.


In fact, if we were trading on seasonality alone, one sector has been a huge BUY in May …


Tech stocks.


The Technology Select Sector SPDR Fund (Ticker: XLK) is an exchange-traded fund (ETF) that essentially takes the temperature of big-cap tech.


Among its top holdings are Apple (Ticker: AAPL), Microsoft (Ticker: MSFT), Nvidia (Ticker: NVDA), and Intel (Ticker: INTC).


And wouldn’t you know it, had you been long the XLK every May since 2010, you would’ve outperformed the broader S&P 500 Index (Ticker: SPX) 82% of the time.


XLK vs. SPX since 2010 – courtesy of StockCharts


In fact, recent history indicates selling TECH in May and going away for the summer would be a bad idea …


May is tied with July and August for the XLK’s best month of the year vs. SPX, looking back about a decade. (June, on the other hand, has been the worst month vs. the rest of the market.)


In closing, I’ll be keeping an eye on this sector — and hunting opportunities in other industries — over the summer, and you should too.


Your Only Option,



Mark Sebastian

J-Pow is the Fed-boy who cried wolf…

Hey There Income Hunters,


It’s awesome to turn the page on April showers and enter into the transitory period of May flowers.

However, before we get to the there, we have a bit of a storm to deal with next week as investors must absorb an all time record in the quarterly 3-year, 10-year and 30-year treasury bonds … 

And  in the middle of bidding for all that supply, the Bureau of Labor Statistics (BLS) will report what will likely be the highest Consumer Price Index (CPI) inflation number we have seen in years. (That will be announced on May 12.)…

But the inflation that’s coming will be anything but transitory.

And it’s not hallucinatory, exaggeratory or even inflammatory.

What it is … is here to stay.

On Friday, even the Fed’s manipulated inflation statistic — the personal consumption expenditure (PCE) was 2.3% — officially over the central bank’s inflation target of 2%.


The key now is the “10-year real rate or return,” meaning the 10-year rate minus the  inflation rate as measured by the consumer price inflation (CPI). Gold tracks the 10-year real rate very closely that is why it is such a powerful indicator…

As the real rate moves further into negative territory, silver and gold prices will rise — and last week the technicals in gold turned positive … 

Today I want to share two very important pieces of information that can help you in the days ahead:

  • My iShares 20 Plus Year Treasury Bond ETF (Ticker:TLT) short versus gold long is killing it and I plan on adding early this week …

  • There is also the top Gold miner stock reporting earnings this week … A major buy signal has also been confirmed with a doubling of the stock expected within a year while also collecting a 1.75% dividend …

There is also the top gold miner stock reporting earnings this week … A major buy signal has also been confirmed with a doubling of the stock expected within a year while also collecting a 1.75% dividend.


The 10-year Real Rate/Gold Relationship

 In two weeks, we could see the real rate go back below -1% …

That’s notable, because the last time it was there, gold was above 2,000 — and I think it will take out that high by the end of June.

The final big test for gold since it moves with Treasury Bond prices is getting through the next couple of weeks of record supply in Treasuries just as the CPI number is reported… 

You see, Gold and the 10-year real rate of return both track inflation… However in this cycle inflation is a much stronger driving force… I believe in the next 2-months Gold will lead the market higher as inflation is stronger the Fed anticipates…

That is why I am short iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT) versus my silver, gold and gold miner positions right now… This trade perfectly fits my opinion that Gold will crush Bonds as inflation picks up…

 I own the TLT 139-137 put spread expiring May 14. So I’m looking for TLT to settle below 137 on that date. Here’s why:

 I am just as bearish on bonds as I am bullish on gold until the 10-year yield rises above 2%. 

That’s because this relationship is so critical as inflation rises. In the 1970s, the US had very little debt so when inflation rose and the Fed was able to raise rates over 6% in just a few years to fight inflation and bring real rates back to zero

And gold? 

Well, it collapsed after rising 800%. See it in the chart below …



Today, as inflation rises, the Fed will be forced to lower rates not raise them… this is because of the enormous debt… the Fed will have to deploy yield curve controls to hold rates down to ensure high real GDP (GDP + inflation) growth. 

Yield curve controls is simply the Fed using QE to buy bonds and keep their yields below a target they choose… Most likely that target will be 2% or 2.25%…

That is their solution for decreasing Federal debt …

The Fed can create 10% real GDP and that type of real growth over many years can get debt back to normal levels, meaning a move from 135% debt-to-GDP because at that level our enormous debt suffocates growth… The Fed goal is to get GDP as high as possible… Historically central banks try and grow their way out of debt…

A Gold Miner Ready to Break Out

The stock that Warren Buffet had a love/hate relationship with about a year ago, Barrick Gold (Ticker: GOLD), is hot again.

A few things to note:

– GOLD has very strong fundamentals and the technicals just turned positive as well.

      • – Barrick has a fairly new management team that has worked very hard to strengthen the company’s balance sheet.
      • – Leadership has worked to reduce long-term debt and increase cash and short-term investments.
      • – They are making a lot of money and report earnings pre-market this Wednesday.

What’s more, a key technical buy signal is also supporting the stock …

It’s called a moving average convergence divergence (MACD) and it’s a very useful momentum indicator that can help traders know when to buy or sell.

Here’s how it’s calculated:

      • – The MACD is calculated by subtracting a 26-period exponential moving average (EMA) from the 12-period EMA…
      • – That gives you the MACD line… Then a 9-day EMA of the MACD “signal line” is plotted on top of the MACD line…
      • – When the MACD crosses above the signal line it is a buy signal. Crossing below is a sell signal. 

In the chart below you can see the MACD crossover in the lower panel and the current prices rising above a rising 200-day MA which signals a continuation of the longer-term uptrend….


Bring It Home

Remember: positive fundamentals and technicals put the odds in our favor. As #IncomeHunters it’s what we seek — a favorable situation with powerful macro forces supporting us.

Have a great week and always…

 Live and Trade With Passion My Friends,

 Griff

Did Ford Screw Us?

Yo Pit Crazies,

 

You don’t think Ford Motor Corp. (Ticker F) screwed us?

 

I think they did!

 

Their earnings report pushed a big warning on chip supply … and they can’t make cars without chips

 

 

I don’t mean potato chips (a shortage there is my fault) … I mean semiconductor chips.

 

The Chips Fall

 

I think part of the market agita on Friday was the F report …

 

Semiconductors now have a trillion-plus in market cap and are a huge part of the global economy. I expect chip supply will increase in the future — since that’s the classic supply-and-demand cycle — but I think Invesco QQQ Trust Series 1 (Ticker: QQQ) caught a cold and it spooked the market. Remember the QQQ holds the largest Big Tech stocks like AAPL, GOOGL, AMZN, NVDA, INTC — and the concentration there in the top five is massive.  

 

Now it will be harder to make money buying calls since the “chip dip” takes upside out.  I like buying calls when the upside looks like a big ramp up. You need head room up top for stocks to rally. If there is little growth, and no revenue growth,  in the short term the market is less likely to take off …

 

With a looming chip shortage, the feeling I get is a lot of sideways action.

 

Chart It Up

 

F 30-day candlestick chart. Yellow line 60-day implied volatility.

 

Note from the volatility chart above that F option prices did not drop a lot after the earnings report. 

 

Before COVID, F volatility was in the mid-20% range. It is still in the mid-40% range, which makes selling options a decent alternative to buying them.

 

I even tried to sell the F May21 11 puts for .34 during an appearance on the The Options Insider podcast on Thursday — but I missed them. I then blamed host Mark Longo for distracting me. Umbrage!

F traded just over $13 in 2021, so it is well off those highs. The F Jun18 11 puts are .45. That is close to a 4% yield (sell the cash secured put/strike price = put yield) to June expiration and I don’t think we’ll see that kind of gain out of SPX to June.

 

Option Pit DC and Wall Street Insider Frank Gregory and I run the Power Income Portfolio and I can see F, with its green ambitions, finding a spot there one day.

 

The Lesson: Sometimes a selloff in a stock is a good time to sell puts and add the stock to a portfolio at lower prices. In the meantime, you get paid to own the stock.

 

The Rundown

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 were some of the comments out of the Pro Room on Friday:

        • “VXX hod (high of day) SPX not lod (low of day)”
        • “SPX barely a move from the open”
        • “Crazy bid for VIX futures into the weekend”
        • “I say we need to absorb EOM (end of month) rebalance selloff in equity before another test of 4,200”

 

Translation: We have some sharp traders in there and the consensus was SPX was feeling a little toppy. I don’t know if that leads to a run to 4,000 in the S&P, but VIX futures were moving higher — way above the SPX dropping lower. That usually is a danger sign and signals a nervous market.

The Pro Room also produces about 30 actionable ideas per week. These were a couple of my favorites from the Roomies:

 

        • Sell-to-open Newmont Corp (Ticker: NEM) 21May 60 puts for .60. NEM goes ex-div (0.55) on 2Jun (leaves one week to adjust)
        • Buy-to-open Twitter (Ticker: TWTR) Jun 50/60 strangle for $3.20

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. 

Mark bought British Petroleum (Ticker: BP) Jun18 25 calls on Tuesday. They are up a bit now, but he’s still looking for higher prices.

Robinhood Trader:
Mark uses the Robinhood Radar to find order flow in active names.

Going green with a call buy in Workhorse Group (Ticker: WKHS) May14 12.5 calls. The AAPL calls Robinhood Trader opened on Thursday were closed on Friday after the chip news.

The Power Income Portfolio:
Frank Gregory and I will 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.

For now, I’m following our Power Income Portfolio trades here in the The Rundown each week as. So you have to tune in to keep up!

The trade I currently like from Frank’s list is Palantir Technologies (PLTR). This is a growth stock play on Big Data. I want to ride this trade to just before earnings on May 11 and close the calls for money.

 

        • I own the PLTR May21 24 calls and 21.5 puts.
        • I am looking at buying the PLTR May07 24/23 puts 1 x 2 for even money to bring in some cash. That way, if PLTR pins $23 next week, I can pick up $200 or so.
        • This acts like a put credit spread but breaks even down to $22. Note again: I already own the 21.5 puts; I expect to add the 1 x 2 put spread Monday.

 

If you have any questions, I will chat on it in the OP Markets Show on Tuesday.

Volatility Edge/Volatility Trading Club:
Vol Edge is showing that the proprietary Option Pit VIX Light Is Red, which means VIX futures are in contango (futures price is higher than the spot price).

VIX closed in Zone 3 (18-23) for the first time in a week — and that puts a halt on the drop to 16. This is a big inflection point to see if the market really takes the F warnings and QQQ performance as a serious threat or just a ripple.

Vol Edge Trade No. 85 bought VXX May21 39/35 put spreads are just down now but there’s a long cycle left with time for it to make money..

In VTC Trade No. 244, I bought the VIX May19 19 puts for 1.20 two times and bought one VIX May19 22 call for 1.60 one time. The trade is down but now I am looking to close the May19 22 calls if we move up the zone anywhere near VIX of 23.

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.

I added an S&P 500 stock ETF (Ticker: SPY) May21 385/400/415 put fly for 1.70 three times and one SPY May21 421/431 call spread one time. This gives me a cheap look at a short-term retracement.

This trade has a great chance of producing big dollars this week. Stay tuned!

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

To Your Trading Success,

AG

Stay in May and Give It a Weigh

Hey Traders,


Once again, I hope you had a profitable week and didn’t get sucked into paying up for a busted earnings trade.


Now, I don’t know about you, but I can’t believe it’s already May!


I’ll be coming to you soon with some of my favorite stocks and sectors for this month, but in the meantime, now is as good a time as any in the calendar year to do a portfolio check.


Kind of like how you get your temperature taken before entering various places these days, to make sure you’re virus-free … 


Now’s a great time to take the temperature of your trading.


Some hedge funds like to do quarterly channel checks, and “window dress” their portfolios so they look better for prospective investors, but I often like to step back and reflect on my personal trading at the one-third calendar marker — which is right now.


Instead of “Sell in May and go away” — a trite, outdated phrase, in my opinion — I prefer to “STAY in May and give it a WEIGH.”


After all, losing trades happen to the best of us, they’re part of the game, but the key to LONGEVITY in anything is LEARNING from your mistakes so you don’t repeat them.


So today, I’ll walk you through ways to evaluate — and hopefully improve — your trading for the remainder of the year.


Wallow in the Losers


Most of you have probably heard the saying, “The definition of insanity is doing the same thing over and over and expecting different results.” 


Well, that logic also applies in the trading game.


Of course, every stock is different, and every day in the markets is a new one with fresh undercurrents, so there’s NO winning strategy that’s literally repeatable when trading stocks and options.


If there were, I’d be doing that instead of writing to you!


But every trader has a bad habit or two they need to break.


This weekend, I encourage you to do some self-reflection — take a look at your trading so far in 2021, and do some postmortem analysis.


Take a gander at your losing trades, specifically, and try to identify where you went wrong, and how you might’ve adjusted to achieve a profit.


Sometimes it’s as simple as, “I made the wrong directional call.” 


Maybe you thought a few stocks would rally, so you bought call options just in time to see the shares nosedive.


If an underlying stock made a major move against you in early 2021, study the charts and see where it went wrong … 


Were there any technical signals that foretold the move? Perhaps a key moving-average cross you missed, or another level of support or resistance that went under your radar?


Hunt for chart patterns that may be playing out under your nose, then keep your eyes peeled the rest of the year.


Or, maybe some of your losers in the first few months of 2021 were due to NOT doing your due diligence


Maybe you just got lazy about checking the collective Wall Street calendar and made an ill-timed trade or two ahead of earnings — an easy habit to correct.


Not as easy to correct? Not doing your due diligence on your option strikes.


I’ve told you before that I like to shop around before committing to an option strike, and I rarely follow the crowd. 


Instead, I’m making trading decisions based on the raw data — like implied volatility (IV) — and my own technical analysis, because a lot of the time there’s a better “deal” than the strike attracting the rest of the Street.


Do a retrospective analysis of your strike selection — was there a better option that could’ve made you money?


Maybe if you’d bought the 97.50-strike call options, instead of the cheaper 100-strike calls … Or perhaps you would have fared better going out another week with your options expiration …


Study your losing option trades over the past few months … and try to spot any repeating pitfalls.


OR, maybe your Achilles heel is not knowing when to exit your trades.


Perhaps your long call on Stock XYZ would’ve made you money earlier this year, IF you hadn’t been so trigger-happy and cut losses too soon …


On the flip side, maybe it would’ve been profitable — or MORE profitable — had you hit the exit sooner, instead of letting GREED get the best of you (which also happens to all of us).


For me, at least, once a trade is up, I NEVER want it to become a loser, and sometimes I end up tapping out too quickly.


Fear and greed are dominant emotions when you have money on the line, and successfully keeping your head straight when you’re neck-deep in a tense trade requires a conscious effort — trust me, I know.


But recognizing these emotions when they come on is the first step to controlling them.


Whatever it is that’s holding you back from making more money, Traders, it’s key that you try to identify and overcome it!


After all, hindsight is 20/20 for a reason … but sometimes in order to put your best foot forward, you have to look back. 


Until next time!


Your Only Option,

Mark Sebastian

Something Weird Is Going On

Yo Pit Crazies

 

I am not quite sure what happened today. Most of the news was good. 

 

But…

 

The VIX was up and S&P 500 (Ticker: SPX) was up. Facebook Inc (Ticker: FB) was up huge.  

 

Oil and banks? Also up.

 

You know what I think is going on?

 

Six trillion in spending proposals is freaking people out!

 

I think the real question is what parts of the agenda gets done.  

 

VIX up and SPX up is odd — and I will explain why. 

 

VIX is composed of every strike with a bid 30 days out in the SPX options. It is an index of the volatility of options.  

 

SPX options 30 days out.

 

Note how the volatility of the options decreases when the strike prices increase … 

 

This means VIX should drop because of the vega component in the index. In other words, lower volatility should mean a lower VIX.

 

When SPX rallies and VIX rallies, liquidity providers EXPAND THE OPTION PRICES. This is generally not bullish for SPX because paper is buying options, usually puts. That is where we find ourselves today.

 

I will give it another day to shake out, but there was a small crosscurrent today and I found it troubling.

 

A trade I liked Wednesday was the SPY Apr30 straddle for 3.65.  I will provide an update in the Pro section since that is where I first posted it.

 

The Lesson: Volatility moves should generally have a negative correlation with the underlying price. VIX up, SPX breaks that pattern and usually signals more realized volatility to come.

 

To learn how to trade that correlation check the Vol Edge or Vol Trade Club. You can join both here.

 

The Rundown

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. 

Mark bought some British Petroleum (Ticker: BP) Jun18 25 calls yesterday and they are up around 30% today, but he did not close them yet.

Robinhood Trader: Mark uses the Robinhood Radar to find order flow in active names.

In the Turbo Trade Mark bought an Apple Inc (Ticker: AAPL) May07 AAPL May7 135-140-145 call fly for .90.  Nice risk-reward there.

The Power Income Portfolio: Frank Gregory and I will 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.

For now, I’m going to follow all of the trades here in The Rundown each week as we get going. So you have to tune in to keep up!

Right now the trade I like from Frank’s list is Palantir Technologies (PLTR).  This is a growth stock play on Big Data.  I want to ride this trade to just before earnings and close the calls for money.

 

I own the PLTR May21 24 calls and 21.5 puts. I am looking at buying the PLTR May07 24/23 puts 1 x 2 for even money to bring in some cash. That way, if PLTR pins $23 next week, I can pick up $200 or so. This acts like a put credit spread but breaks even down to $22.  Note that I already own the 21.5 puts, So I  have a small risk there.

 

If you have any questions, I will chat on it in the OP Markets Show Friday.

Volatility Edge/Volatility Trading Club: Vol Edge is showing that the proprietary Option Pit VIX Light Is Red, which means VIX futures are in contango (futures price is higher than the spot price).

Vol Edge Trade No. 85 bought VXX May21 39/35 put spreads and they are up about 10%

In VTC Trade No. 244, I bought the VIX May19 19 puts for 1.20 two times and bought one VIX May19 22 call for 1.60 one time. 

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.

I added an S&P 500 stock ETF (Ticker: SPY) May21 385/400/415 put fly for 1.70 three times and one SPY May21 421/431 call spread one time. This gives me a cheap look at a short-term retracement.

This was very close to being a homerun today — but SPY stopped at 417.50. If VIX is any indication, we might have another shot at it.

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.

The Pro Room produces about 30 actionable ideas per week. These were a couple of my favorites from the Roomies 

      • Buy to open SPY Apr30 317.5 straddle, long the call and long the put, for 3.65. I posted this trade to the Pro Chat Room as I thought .75% of SPY value was too low for 2.5 days to hold the trade. The calls traded as high as 3.50 and the puts 1.50. I did not nick the high and low but made decent money per straddle.
          • Sometimes short term straddles with an event, like earnings, FOMC etc. price cheaply to hold for a few days.

To Your Trading Success,

 

AG

Fat Cats Expect This Airline Stock to Fly Higher

Hey Traders,

 

I hope your trading week is going well so far, and that if you’re playing earnings roulette, you’re not paying those hefty premium taxes

 

As many of you already know, part of my Robinhood Trader strategy is spying on the institutional money — the market-maker cash that can move stocks quickly.

 

When I see this “impact money” combined with retail-trader interest — the same crowd that fueled the GameStop (Ticker: GME) drama earlier this year — my ears perk up.

 

It tells me two things:

 

        1. Social media platforms like Reddit’s /wallstreetbets could put a lot more eyeballs on a stock that’s trending; and
        2. An institutional cash injection could sustain a stock’s rally, so it’s more than just a blip on the charts.

 

That’s why I always have my ear to the ground of the option pit — because I want to spy on the big financial players to find out what’s on their radar.

 

And earlier this week, a MASSIVE trade on one stock — a stock I like for many reasons, which I’ll outline today — really piqued my interest.

 

Let’s dive into the big, bullish bet on one of my favorite airline stocks right now.  

 

American Rock ‘n’ Roll

 

On Monday afternoon, symmetrical blocks of 65,000 contracts traded on the American Airlines (Ticker: AAL) May 15-strike and November 17-strike call options.

 

They represented the two biggest equity option sweeps of the entire session, according to Trade-Alert, and the trade equated to about 6.5 MILLION AAL shares (since one option controls 100 shares).

 

AAL option trades on April 26, 2021 

 

Digging deeper, it looks like institutional players may have sold to close the May 15-strike calls, and then bought to open the November 17-strike calls.

 

But why? What does this mean?

 

It means they likely rolled a bullish AAL options position higher and further out in time.

 

Specifically, considering AAL shares have roughly doubled since their October lows, the trader cashed in a big winner and used some of the proceeds to extend the bullish position via higher-strike calls with more time to expiration.

 

After all, AAL is trading just shy of $22 — meaning the 15-strike calls had about $6 in intrinsic value (the difference between an in-the-money option strike and the underlying stock’s price).

 

Daily chart of AAL – courtesy of StockCharts

 

Now this trader wants AAL shares to fly even higher above $17, the new call strike.

 

Outside of LEAPS — or Long-term Equity AnticiPation Securities — which expire every January going out a few years, the November 17-strike call is now THE most heavily populated strike among all American Airlines options.

 

With 65,122 call contracts now parked at this strike, it’s safe to say that Monday’s massive trade is responsible for nearly all of that open interest.

 

AAL open interest as of April 27, 2021 – courtesy of Trade-Alert

 

Will AAL Take Off?

 

As I said, American Airlines is among my favorite travel stocks at the moment, and here are just some of the reasons why:

 

        1. There’s a sector rotation underway right now that’s typically benefited travel stocks like cruise lines and airliners, and as they say, “Industry momentum lifts all boats.”
        2. The whole world is ITCHING to get out and make up for lost time, and the collective post-pandemic stir-craziness should bode well for AAL.
        3. The risk/reward for a bullish play looks enticing — the stock has been flying high lately, but not so high it looks overdone; there’s still lots of room to the upside, from where I sit.

 

We’ll see what happens, but I’ll be watching AAL closely after the recent pullback — and it looks like some “impact money” will be stalking the shares, too.

 

Until next time …

 

Your Only Option,

 

Mark Sebastian 

A Quickie on the VXX Split

Hey Traders,

 

As most of you know, I’m a volatility geek.

 

I was in the room when the Cboe Volatility Index (Ticker: VIX) was but a concept, so I like to think of myself as a “helicopter parent” of sorts, keeping close tabs on — and often making money on — Wall Street’s “fear index.”

 

In fact, I have a proprietary Traffic Light to let me know when it’s a good time to speculate on volatility or put on a hedge (which can be expensive). 

 

So if the VIX has been like a kid to me, perhaps that makes me a grandparent of sorts to all the VIX offspring, including the iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX).

 

And after the close last Thursday, April 22, the VXX — which essentially allows traders to speculate on the short-term direction of the VIX — underwent a 1-for-4 reverse split.

 

So today, I’d like to give a brief primer on what the VXX is, what the reverse split means and why it happened, and how NOT to trade the volatility exchange-traded note (ETN). 

 

VXX in a Nutshell

 

Let me begin with this, because it’s important: 

 

If you want to get really comfortable trading VXX, you should understand the following three things, which I discuss frequently in my Volatility Edge program:

 

        1. VIX cash and futures
        2. Implied volatility (IV) and VXX
        3. Contango and backwardation

 

HOWEVER, I recognize that volatility products can be extremely intimidating for new — and even old — stock and option traders.

 

They’re complex and convoluted, and words like “contango” and “backwardation” can send even the most seasoned speculators into a coma.

 

So without getting too bogged down in the nitty-gritty, here are a few things to know about VXX and its split …

 

VXX is machine-like in its operation — every day, it’s basically selling a front-month VIX future, and buying the next-term VIX future.

 

On a day-to-day basis, the VXX can go up or down quickly, and is heavily correlated to the actual VIX.

 

In the long-term, though, VXX goes out of business slowly.

 

VXX, by nature, is a downward-sloping vehicle, pretty much constantly headed to zero in the face of time decay.

 

Barring some wild market event that spooks Wall Street and bids up VIX options — like the beginning of the pandemic in late February 2020 — VXX charts usually mimic the trajectory of a skydiver jumping out of a plane.

 

Daily chart of VXX – courtesy of StockCharts

 

And BECAUSE VXX is in a virtually constant state of decay, it undergoes regular reverse splits to keep it from actually hitting $0.

 

Trading VXX (Or Not)

 

All that said, one would never want to “own” VXX — it’s certainly not a long-term buy & hold trade.

 

That would basically be like buying a 30-delta put option every month, letting its value decay to $0, and then rolling it to the next month’s series.

 

But if you understand term structure and how to estimate VIX futures, VXX can be a great vehicle to place short-term bets on volatility.

 

If I wanted to short volatility, for instance, I could buy VXX put options … 

 

Or I could buy VXX call options if I think VIX futures are headed higher … though there are ways for the VIX to go higher and a VXX call option to still lose value.

 

However, if I see the stock market AND volatility products rallying in tandem, that tells me that volatility traders are scared … and vol money is usually smart money, in my experience.

 

So sometimes, the best VXX trade is nothing at all …

 

In closing, the VXX is typically pretty predictable in its path lower, but the best way to ride this volatility product to short-term profits is to take the time to understand it.

 

Find yourself a Volatility Lifeguard like me or my colleague Andrew Giovinazzi, and let us teach you the math behind the VXX movement … it’s probably a lot easier — and more profitable — than you think. 

 

Your Only Option,

 

Mark Sebastian