Hey There Shoppers,
I sure hope you are all reading Option Pit CEO Mark Sebastian’s free newsletter VIX Edge.
It comes out daily and keeps you in tune with the relationship between volatility and the market and what each is signaling.
If you read Thursday’s edition and followed his recommendation in SPDR Gold Shares (TIcker: GLD), then you could have been up 41% in just 24 hours!
Mark recommended buying the GLD Jun18 170 calls paying $3.20. GLD closed Thursday near its high of the day at $170.29.
On Friday GLD gapped up on the opening to $171.53 and traded a high of $172.55.
The Jun18 170 calls traded a high of $4.56. Not that we always sell on the highs and buy on the lows, but the opportunity was there to make some real money.
The funny thing is, Mark had piggy-backed his idea off another one from Option Pit Income Trader Bill Griffo and his free newsletter Power Income, which is also a must read!
Griff is all about giving you the deets on the Fed, bonds, money supply and inflation.
Not only that, but he hosts a live session every Wednesday morning at 9 a.m. EST and you can use this link to join Griff each week for Power Income LIVE.
I’m telling you all this for two reasons …
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- You can expand your knowledge, repertoire and trading opportunities with these two very successful traders.
- I am also ready to recommend a trade in GLD!
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My Golden Moment
Initially, you may think my idea is completely contradictory to Mark’s, but, au contraire, that is the magic of options.
Mark Sebastian recommended buying calls in GLD.
I am recommending buying puts in GLD. Here’s why …
A doji has appeared at the top of this recent uptrend in GLD. Remember a doji occurs when the buyers and sellers battle it out during the candle interval (a day, in this case) and neither side prevails.
The battle can be seen by the shape of the candle. It has little or no real body i.e. the opening and closing prices were very close. It also has longer upper and lower shadows.
This could be a signal of a reversal of this uptrend, but I need confirmation via a lower opening on Monday morning.
If GLD opens lower on Monday, I would like to buy the Jun18 171 puts with an implied volatility of 14.08 and sell the Jun18 161 puts at an implied vol of 15.64.
I would pay up to $2.50 for this 10-point spread with 42 days until expiration.
So, yes, I am calling for the stock to trade lower and Mark has called the stock to trade higher (which it already has), in the next 42 days.
Do the Backspread
If you were to combine our two positions, you would have a backspread position on.
In a backspread, you are long calls and puts, meaning you own premium and volatility, so you are looking for movement in the stock.
Here is the graph of a backspread. The more the stock moves in either direction, the more money you can make. If it moves in both directions you can make money on your calls and your puts.
Time is your enemy in a backspread. Every day, your options will decay unless the volatility goes up with a quick, strong move in one direction or with wild gyrations.
You can also scalp stock with this position, buying and selling the stock back and forth to make up for your options’ decay.
Trade Review
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- On May 5, I recommended a spread in Teladoc (Ticker: TDOC). Out of the gate Wednesday morning, TDOC traded lower, then quickly, but very briefly, came back to unchanged where I was able to exit my spread for a loss of 41%. Smart move as TDOC has traded $11 lower.
- The Zillow (Ticker: Z) hammer did not pan out. The stock opened up a bit and proceeded to fall out of bed trading down $12 on Wednesday.
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Be sure to let me know at licia@optionpithp.local if you would like to be added to Mark and Bill’s VIP lists to receive their newsletters.
Thanks for Reading … See You Next Tuesday!
Licia Leslie