It Takes Two

Yo Pit Crazies,

Democrats and Republicans have agreed to the first bi-partisan bill in what feels like 10 years.

They agreed to spend 1 trillion dollars on infrastructure …

After starting out demanding a paltry $1 million in the Austin Powers movies, Dr. Evil (above) finally got the number big enough to freak everyone out …

I think this is the reverse, where compromise was small enough that it didn’t freak out the stock market.

In fact, the VIX closed with a new Covid-era low.

The rally was not that big — that’s a clue!

Read on how to trade it. (There’s even a video!)

One of the bigger issues with volatility this year has not been the size of the selloffs, but rather the size of the rallies. 

Crazy 2% rallies were not uncommon in the year of the meme stock — and a 2% S&P 500  rally is a 32% volatility. 

It is hard for VIX to drop into the teens and stay there when stocks are taking off like a rocket.  

VIX is also measuring/forecasting absolute 30 day moves in SPX. An up move in volatility can keep VIX higher, too.


Option Pit Fair Value Calculator with FUTURE PREMIUMS way above fair (green bar) again.

With VIX closing so low, most of the volatility products will move slower as just the daily decay parts of the product weigh on the values. (Note above the lower VIX cash at $15.89 relative to the July and August futures.)

As the VIX cash drops, that signals traders sense less movement in the short term.  Since traders are not willing or able to lower back month volatility, the futures premiums keep getting higher and higher (green line) relative to the cash number.

This is the basis for forward Volatility in calendar trading. (Need that in English? The link to explain the concept is here.)

And that is a discrepancy I want to exploit by buying SPY options and VXX puts.

VXX puts “sell the green futures,” while SPY options buy the cheaper implied volatilities in the short term options. (SPX and SPY IVs are nearly identical). See what it looks like in theVolatility Trading Club section below!

The Lesson: If there is just a drop in the future premium back to fair value, VXX and UVXY can get smoked, even if SPX does not move anywhere.


The Rundown

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

      • Mark closed a ProShares Trust Ultra VIX Short Term Futures (Ticker: UVXY) for a 75% gain today. Great job!
      • He has nice looking long call trades in Palantir (Ticker: PLTR), Ford (Ticker: F) and ExxonMobil (Ticker: XOM).

Power Moves Portfolio 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.

The live trade log is here, and I’ll have a full recap for you every Wednesday.

I made a Tesla Inc. (TSLA) two-hour trade today, buying an upside call butterfly in the July 02 700/740/780 strikes and turned it around for a 25% profit.

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. 

Most of the commodity stocks are still making a comeback.

In a Pro training session yesterday, one of my students brought up GLD Jan. 2022 22-strike calls for $1.55. Those might be the cheapest calls on the planet at this point.

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.

      • Fastly Inc (FSLY) made a power move yesterday, up almost $4 to bring the position back to the black. I sold the July 16 65-strike calls at $2.25 for 50% gain on those calls.

Volatility Edge/Volatility Trading Club:

The Option Pit VIX Light is still red, and the VIX broke 16 momentarily on Wednesday. We saw the 15 handle (whole number) on Thursday and will most likely get a 14 handle Friday.

VIX melted again after the infrastructure deal was announced. Once again, less uncertainty on the horizon.

Mark closed the rest of Trade No. 98 UVXY July 02 31-strike puts in for $3.20 today — for a 75% gain, and rolled into trade #100 UVXY July 02 27-strike puts for .95!

For the Volatility Trading Club:

.

      • Trade No. 250 is going better
      • It’s the iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) June 25/July 09 30-strike put spreads for $.85 with a call hedge.
      • VXX is still dropping and I sold a third set of puts at $1.82 today. now I’m in a can’t-lose situation and got paid to stay long a VXX call for the next two pivotal weeks..  
      • Remember, a lot of vol strategies I use are market neutral. That means whether 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!

To Your Trading Success,

AG

 

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