Some Volatilities Are Really Low

Yo Pit Crazies,

 

When is the best time to buy options?  

 

Anytime a big move is cued up and ready to go.

 

Now, you may ask, how can I know when that is?

 

Well, a couple of ways…

 

One is a giant short squeeze … 

 

Essentially the option model is broken because no one can sell stock anymore. 

 

Kaboom!

 

But you have to wait for a special event Thursday to see how to trade that.  

 

Another way to spot a big move is a calendar item. Say, like, the FOMC deciding how dovish to be for the next month.

 

I know that date is this afternoon — and it could have huge implications for volatility, tech stocks, gold and a whole host of things.

 

That could be a big move!

 

The Calendar Killed the Option Model

Remember the Black Scholes options pricing model was made to price an annual stream of volatility.

 

That is 365 calendar days, not just one. 

 

Stock movement is distributed over a long period of time in the Black Scholes assumption, and it works very well for that in pricing options.

 

What Black Scholes has a hard time doing is pricing one day or very short periods of time …  

 

Like a Fed announcement for instance.

 

The potential move can be way more than the current volatility is priced so the liquidity providers will charge more now for the time.

 

A way to trade this is just making a bet on the direction of volatility instead of the S&P 500 as a whole.

 

      • SPX can stay flat, but volatility can drop a lot.
      • SPX can drop a lot, but volatility will increase a lot

 

Note, volatility can make a good move even if SPX does not.

 

I posted this trade in The Pitstop newsletter yesterday, expecting it to actionable today.

I’m bid $1.81 for the VXX June18 32-strike puts and 34-strike calls …

I filled this into the close and already closed 80% of the puts at $1.72 midday Wednesday.

 

The Lesson: There is opportunity when the inputs to the Black Scholes model are “broken” for a period of time. You can also catch our Short Squeeze webinar this week.

 


 

The Rundown

Mark was out last week, so expect The Rundown to heat back up in the coming days.


Power Moves Portfolio

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. Aiming for positive theta trades and using that income to buy calls is the big growth opportunity.

I have not been able to enter BXW Technologies (Ticker: BXWT) yet.

Frank wrote up some stock sales and antitrust noise for FAANG stocks, so I might go back to my shorter term Invesco QQQ Trust (Ticker: QQQ) puts. I own some for the rest of this week.

Albemarle Corp (Ticker: ALB) is a best-of-breed lithium producer and has pulled back a bit.  I am looking for a short put spread in Juyl there.

      • Net we own puts in Ford (Ticker: F), QQQ,Taiwan Semiconductor Mfg. (Ticker: TSM) and Palantir (Ticker: PLTR).
      • Net we own some calls in The Global X Cybersecurity ETF (Ticker: BUG), General Electric (Ticker: GE), Taiwan Semiconductor Mfg. (Ticker: TSM), and PLTR.
      • We have some short put spreads for theta in GE and Cleveland-Cliffs (Ticker: CLF) now.

 

      • We are back in CLF with a sale of five CLF July 16 15-/21-strike put spreads at $.96. This is a big chunk of capital, and we will adjust with a put if we need to. The implied volatility (IV) is super high in CLF, so we’re just looking for the $20 area to get back in.
      • BP/QQQ is working out, so I own the June 18 325-strike puts for a 5% credit on the initial position risk.
      • BUG is making a new high and our four BUG Sept. 17 28-strike calls for $1.25 are up $.25, or about 20%. The stock is illiquid, but the IV in the calls are cheap, so we thought this was the best way to play the Ransomware story. We’re looking for a double on the calls.
      • GE is a play on green energy. We own two GE Sept. 17 14-strike calls for a credit. We added a sale of two GE July 16 12-/14-strike put spreads at $.62. The idea is to help out the calls a bit in the premium area.
      • We bought two TSM July 21 125-strike calls for $2.51. TSM did see a near-term high yesterday for $122 and made it a third try to break out — but failed. I will most likely exit for a small loss and move on.
      • PLTR stock has stalled and we have just one call here and two puts. Stock is stuck and I will most likely just close the remaining calls this week. On the positive side, PLTR is just hanging around.

To Your Trading Success,

 

AG

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