Something Weird Is Going On

Yo Pit Crazies


I am not quite sure what happened today. Most of the news was good. 




The VIX was up and S&P 500 (Ticker: SPX) was up. Facebook Inc (Ticker: FB) was up huge.  


Oil and banks? Also up.


You know what I think is going on?


Six trillion in spending proposals is freaking people out!


I think the real question is what parts of the agenda gets done.  


VIX up and SPX up is odd — and I will explain why. 


VIX is composed of every strike with a bid 30 days out in the SPX options. It is an index of the volatility of options.  


SPX options 30 days out.


Note how the volatility of the options decreases when the strike prices increase … 


This means VIX should drop because of the vega component in the index. In other words, lower volatility should mean a lower VIX.


When SPX rallies and VIX rallies, liquidity providers EXPAND THE OPTION PRICES. This is generally not bullish for SPX because paper is buying options, usually puts. That is where we find ourselves today.


I will give it another day to shake out, but there was a small crosscurrent today and I found it troubling.


A trade I liked Wednesday was the SPY Apr30 straddle for 3.65.  I will provide an update in the Pro section since that is where I first posted it.


The Lesson: Volatility moves should generally have a negative correlation with the underlying price. VIX up, SPX breaks that pattern and usually signals more realized volatility to come.


To learn how to trade that correlation check the Vol Edge or Vol Trade Club. You can join both here.


The Rundown

Sharp Bets: Mark Sebastian runs our marquee long option strategy. SB specializes in low-implied volatility calls and puts and managing trade size for a risk-adjusted portfolio of options. 

Mark bought some British Petroleum (Ticker: BP) Jun18 25 calls yesterday and they are up around 30% today, but he did not close them yet.

Robinhood Trader: Mark uses the Robinhood Radar to find order flow in active names.

In the Turbo Trade Mark bought an Apple Inc (Ticker: AAPL) May07 AAPL May7 135-140-145 call fly for .90.  Nice risk-reward there.

The Power Income Portfolio: Frank Gregory and I will run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K-Street knowledge and my option expertise.

For now, I’m going to follow all of the trades here in The Rundown each week as we get going. So you have to tune in to keep up!

Right now the trade I like from Frank’s list is Palantir Technologies (PLTR).  This is a growth stock play on Big Data.  I want to ride this trade to just before earnings and close the calls for money.


I own the PLTR May21 24 calls and 21.5 puts. I am looking at buying the PLTR May07 24/23 puts 1 x 2 for even money to bring in some cash. That way, if PLTR pins $23 next week, I can pick up $200 or so. This acts like a put credit spread but breaks even down to $22.  Note that I already own the 21.5 puts, So I  have a small risk there.


If you have any questions, I will chat on it in the OP Markets Show Friday.

Volatility Edge/Volatility Trading Club: Vol Edge is showing that the proprietary Option Pit VIX Light Is Red, which means VIX futures are in contango (futures price is higher than the spot price).

Vol Edge Trade No. 85 bought VXX May21 39/35 put spreads and they are up about 10%

In VTC Trade No. 244, I bought the VIX May19 19 puts for 1.20 two times and bought one VIX May19 22 call for 1.60 one time. 

Remember, a lot of vol strategies I use are market neutral. That means if 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!

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.

I added an S&P 500 stock ETF (Ticker: SPY) May21 385/400/415 put fly for 1.70 three times and one SPY May21 421/431 call spread one time. This gives me a cheap look at a short-term retracement.

This was very close to being a homerun today — but SPY stopped at 417.50. If VIX is any indication, we might have another shot at it.

Pro Trading Room: This is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me all during the trading session.

The Pro Room produces about 30 actionable ideas per week. These were a couple of my favorites from the Roomies 

      • Buy to open SPY Apr30 317.5 straddle, long the call and long the put, for 3.65. I posted this trade to the Pro Chat Room as I thought .75% of SPY value was too low for 2.5 days to hold the trade. The calls traded as high as 3.50 and the puts 1.50. I did not nick the high and low but made decent money per straddle.
          • Sometimes short term straddles with an event, like earnings, FOMC etc. price cheaply to hold for a few days.

To Your Trading Success,



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