BY ANDREW GIOVINAZZI

August 29, 2023 

Yo Pit Crazies,

Sometimes, there’s not much to do in the option markets. I’ve had summer days where I would fall asleep in the pit because business was so slow. Other days I couldn’t leave the pit because the action was crazy. 6.5 hours of pure mayhem.

Volumes now are 20x higher than when I was a floor trader, so a slow day is relative. But Monday was slow – up and slow.

But not for VIX. On Monday, VIX was down .50 a point.

30 day VIX chart try to get to pre downgrade lows

How does one trade it?

Having an Opinion and Looking for an Edge

Opinions are like belly buttons – everyone has one. Edge is a little different. Is there a statistical advantage for a position for a period of time?  Does a trade outperform the option model? Can I quantify the edge in the trade? These are things all option traders can learn if they want to.

What is the reason for the trade?

Right now, I think stocks will rally and VIX will drop. Is the market giving me anything for that opinion?  For Monday, not enough for me to add a new position. I’m already long VIX puts versus upside 5 to 1.

Why do I think we rally? SPX does not sell off. It doesn’t mean it can’t, it just hasn’t this summer.  150 points in SPX, 4% from the dead top this year, isn’t really a selloff.

Downgrades below and SPX cannot crater. Some edge is crawling back in the VIX futures, so short the vol products like iPath Series B S&P 500 VIX Short Term Futures ETN (Ticker: VXX) could work.

VIX futures curve

Pretty soon, those VIX futures will get priced and will look expensive relative to SPX options.  Then I will add more. Part of being Pro is waiting for better entries.

To learn more about how to master the art of trading like a pro, join me and Mark tomorrow at 7 p.m. ET for a free info session on the five Areas of Trading Mastery.

To Your Trading Success,

AG