Smarter Not Harder

The Option Pit VIX Light Is Red, and volatility will go down.


Hey Traders,


Despite what you read in the media…


VIX is going lower.


And even if it does pop, we’re not going to see 80 — or 40. We could get to 30, I guess, but just know this …


We are more likely to see 12 than 50 in the VIX.


That’s why hedges have to be smart.


Strangulation


On Thursday, a trader executed a strangle in VIX that I kind of like:





The trader bought, at the same time, the VIX July 18 puts and the July 45 calls, paying a total of $2.16.


If the VIX goes to 15 then the spread will make .84 (18-15-2.16=.84).


But here is the kicker to the strangle …


If the VIX blows higher, the trader has long calls on which they can make a pretty hefty profit.


The way a strangle works, a trader wants the underlying to either drop or pop.


In this case, I think the trader is PLANNING on VIX dropping, but hedging against a pop.


BUT…


There is a smarter way to go about this — and it’s a trade we do all the time in Volatility Trading Club (a great program that is now also a bonus for Volatility Edge Lifetime subscribers).


Mark’s Way


In my webinar on Wednesday night I told traders I wanted to go short volatility in July …


On Thursday I revealed to my Vol Edge subscribers the strike I wanted to use — the 19 puts — and explained my logic in detail to the subscribers.


Now in VTC, we do things a little differently.


We build a trade that makes money off the VIX dropping … but we use the profit and loss created by the drop to put on a free hedge (or one even for a credit!).


This is NOT that dissimilar from the strangle the big institutional trader did.


However, we are a little smarter about vol.


We know that VIX skew is expensive — calls get more and more pricey as one looks further and further out-of-the-money.


So rather than just buy a WAY out of the money call, we create a spread.


Let me tell you the twist I would put on this trader’s spread …


I have no issue with the puts they bought.


But the 45 calls …


Rather than simply buying those, I would rather buy the 30-40 call spread for almost the exact same price (1.10).


The position ends up looking like this:



If the VIX drops to 15, I still make all those dollars that the trader was trying to collect.


BUT, rather than needing VIX to completely explode higher to make a profit — I make money if the VIX simply rallies.


The Takeaway


Volatility might seem scary, but it is the key to simple and consistent profits.


With the trading strategy we employ in Vol Edge and VTC, those profits are ours for the taking.


Why don’t you join us?


The Option Pit VIX Light Is Red, and volatility will go down.


Your Only Option,


Mark Sebastian

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