There’s a Fight Across the Street!

Yo Pit Crazies,

 

Yesterday was a scrum, a scrap, a ruckus.

 

Even a fight if, you will.

 

Bulls and bears duked it out most of the day while the SPDR S&P 500 ETF Trust (Ticker: SPY) rode a 1.5% move bottom to top.

 

Near the close, one of my students asked why VIX didn’t drop when the market was barely moving (about .80% or just over a 12% volatility).

 

I replied by comparing it to walking down a city sidewalk and noticing there’s a fight on the other side of the street …

 

You see it, but you’re not involved.

 

But just watching a violent altercation (probably while filming on your cell phone), even though it’s not happening to you per se, creates nerves and adrenaline.

 

The first instinct is often to GET THE HECK OUT OF THERE.

 

In the world of option volatility, that equates to buying puts in a big index like S&P 500 (Ticker: SPX) — or at least not selling them. Either of those things keeps volatility from dissipating, so the net effect, even with stock moving up, is VIX won’t go down.

 

Note the massive launch in the SPX below. Traders don’t easily forget 1% rallies in 30 min …

 

They carry the scars of the move, meaning they remember the last big swing,  so they price options accordingly. They don’t like getting fooled twice. (I mean, do you?

 

5 day tick chart of SPX on the top and implied volatility on the bottom in May, Jun and Jul expirations

 

One of the losing sides of the fight was Cathy Wood’s ARK funds. Her group of high-flying tech stocks got smoked while more vanilla stocks like oil, gas and banks had a decent day.

 

 

The big exit in ARK made folks nervous. It is hard for VIX to drop when some market sectors are down 2-3% in a day …

 

So a fight in one place puts active traders on the sidelines in case the melee spreads across the street, so to speak.

 

That’s my story and I’m sticking to it. Look, the Option Pit VIX Light even turned yellow!

 

THE LESSON: VIX needs willing options sellers in the SPX in order to go down. Those sellers seem to stop at 16 VIX lately as COVID-land never ceases to bring the surprises.

 

The Rundown

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 a SPY Iron Condor this week. On Thursday it was down $50 per five-lot, as SPY did a massive whipsaw (from down .75% to up .75%), so even with the positive move up near the close, implied volatility did not drop. I added SPY calls this morning to adjust, purchasing one SPY May14 422 call for every five Iron Condors I sold.

 

Last week, I added a SPY May21 385/400/415 put fly for 1.70 three times and a SPY May21 421/431 call spread one time. I closed one put fly at 2.45. This leaves me owning two more flies for 2.55 from initial cost. The call spread is even. The SPY flies traded as high as $2.21 on Thursday.

 

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.

 

Some ideas I posted yesterday in the OP Pro Trading Room:

• • • Sell-to-open Pfizer (Ticker: PFE) May21 38 puts at .45
      
      • I put this on the open and closed it for a small gain after Mark got a little bearish PFE at the end of the day.
      •  
      • When PFE dies down, I might go back to the put write — but I can wait.
    •  
    • Sell-to-open Fastly (Ticker: FSLY) May21 30/35 put spreads at .45.
      
      • I could not fill this Thursday into the close and planned to try on Friday. I’ll let you know the latest in the Option Pit Stop later this afternoon after the close.
        
      • FSLY is one of those growth names I want to own. I’m just waiting for a good price — and $35 seems pretty tasty.

 

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 closed the rest of the British Petroleum (Ticker: BP) Jun18 25 calls for an 80% gain, and the Walgreens (Ticker: WBA) Jul16 55 calls are up about 25%.

 

Nike (Ticker: NKE), Nordstrom (Ticker: JWN) and Coca-Cola (Ticker: KO) have a shot at getting back to even this May21 expiration.

 

The Power Income Starting Lineup Portfolio:

Frank Gregory and 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.

 

The Power Moves Starting Lineup 

 

Here is the early Starting Lineup for the  Power Income Portfolio. I plan on rolling my 2 Palantir (Ticker: PLTR) May07 22.5 puts to next week since I am still covered with the May21 21.5s.

 

PLTR got swept up in the ARK selloff yesterday, but I want to make this a longer term hold at a lower price.

Volatility Edge/Volatility Trading Club:

 

Very little action in either product on Thursday, aside from the Option Pit VIX Light turning yellow. Mark did a great job of explaining why here. 

 

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!

Robinhood Trader:

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

 

Mark has open long puts in Twitter (Ticker: TWTR) and Ford (Ticker: F) with the positions just underwater right now — but hang tight on those.

 

Like what you’re seeing? Have more questions? Drop a comment below!

 

To Your Trading Success,

 

AG