Hedges on Hedges

The Option Pit VIX Light Is Yellow: VIX Is Going to Move Wildly.

Hey Traders,

I hope you saw my chart work on Jim Cramer’s Mad Money last night … I explained exactly what I thought the next few weeks will look like …

But if you missed it, here’s the good news … 

You already know because you read the VIX EDGE EVERY DAY!

Plus, here’s a small taste.


So, boy, did the SPX have an ugly close on Tuesday …

Not enough to flip the light green, but really close …

I am almost certain the VIX Light goes green on Wednesday.

With that in mind, I want to point out a couple of trades I really liked that went up on Tuesday mid-day.

Check them out below …

Back in the Straddle

Despite the ugly close on Tuesday, the VIX light stayed yellow.

I think I could get a green light on Wednesday …

But I think it will be short lived … maybe only for a week or so.

I want to talk about two trades that I saw on Tuesday.

The trades were essentially the same trade, just different monthly contracts:

The first trade is the July 17-strike puts for $0.55, and the July 50-strike calls for $0.84.

The same customer bought both options.

The institutional customer paid a net price of $1.39 per contract for the strangle ($0.55 + $0.84).

This means this investor will make money if the VIX drops below 15.61 — a place that has yet to be seen since the start of the pandemic, but entirely plausible.

Or, alternatively …

If the VIX blows up, the trader has the 50-strike calls as a hedge.

In my opinion, the calls represent a portfolio hedge against the VIX running higher, with a hedge on the hedge with the 17-strike puts, in case the VIX collapses (the more likely scenario).

The second trade is almost exactly the same trade, and could even be the same trader.

The only difference is the month, trade size, and ratio.

A customer bought 52,780 August 17-strike puts for $0.70 per contract, and 45,780 August 50-strike calls for $1.18.

Later in the day, another customer piggybacked the trade by putting up another 5,000 on even numbers (instead of the slight ratio the trader executed it 1 to 1, or in this case 5,000 by 5,000). 

This is, again, a portfolio hedge, with yet another hedge on the hedge.

The ratio is likely designed to reduce the overall cost of the trade, and keep the exposure somewhat similar on the upside and downside.

I think both trades are smart, and make a lot of sense for those worried about a potential market blow up …

With the VIX Light about to turn green, it just makes a lot of sense to hedge in either direction.

We do similar trades all the time in our Volatility Edge program.

Stay Fly

For example, just last week I bought the May 20-strike puts, and the May 25-32.5-40 strike call fly as a package, for just $0.96 per contract.

The next day, I got to sell the May 20-strike puts at $1.20 …

Now I own the call fly for a credit into expiration on Wednesday!

If I were going to recreate this trade for June, I would do it like this:

I would buy the June 18-strike put for $0.60, and the June 30-50 strike call spread for $1.00

The net cost is $1.60 per contract, and I make good money if the VIX drops below 16.40 (territory it has seen recently) and/or if the VIX blows up towards 50.

Your Only Option,

Mark Sebastian

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