VIX Got Hit by a Train

Yo Pit Crazies,

 

What a ride last week for VIX.

 

The index went from 17 to 27 to 18.81 — in 4 days!

 

I know theme parks are reopening, but that is a roller coaster many didn’t see coming.

 

Did I know it would happen?  Not exactly like that, but I did get prepared for a big movement. I’ll discuss that further in just a moment.

 

Also, be sure to check out the Pro Chat Room section below for an on Option Pit Pro Trader Profile! It’s an occasional spotlight on our students — and it includes tips and tricks to make you a better trader. 

 

About Last Week

 

The first thing is to separate investing from trading …

 

I use market pullbacks as a time to add to investments (see The Power Moves Portfolio this week) but also take advantage of short-term moves in options. Here, we’re focusing on the short term …

 

Note the chart of iPath Series B S&P 500 VIX short term futures ETN (VXX) below. Why do I like a product that is down 99% since inception?

 

Because when VIX moves … VXX moves a lot!

 

In the lower half of the chart, see how the red line is moving sharply higher and nearly correlated to the peak of VXX’s move up in the upper part of the chart.

 

When volatility and price move together in VXX, it is a big tell.

 

Stormy weather … runaway train … “Danger, Will Robinson” … the stock market is about to get VOLATILE

 

And it did.

 

VXX five-day chart showing implied volatility (bottom) and candlesticks (top).

 

So the question is … How do you trade this?

 

Mark Sebastian, our fearless leader, explained how to do just that in an All Hands on Deck session on Thursday, which led to the idea for Vol Edge trade No. 88. I will cover the trade below in the Vol Edge/VTC section below.

 

THE LESSON: In short-term trading, quick spikes in volatility are usually a sign of things to come. For longer term investors, they can be an opportunity to buy stocks at great prices.

 

The Rundown

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. 

 

Today, we have the first Pro Trading Room Trader Profile, an occasional series spotlighting some of Option Pit’s top students.

 

I have a lot of students to choose from, but for kickoff I chose none other than the Father of the Edge Hunter Sheets Scott B.!

 

Scott has been with Option Pit since 2014. I even dug out his old Option Pit Silver proficiency test before we chatted this week. As I suspected, he did very well on them.

 

While I talk to Scott every week for updates and developing our OP Edge Hunter sheets, I did not know much about his journey prior to Option Pit.

 

Scott started trading stocks more than 15 years ago and began to dabble in options not long after. The 2008 crash left him with a “there has to be more to it than this” feeling, as he was mostly treading water trading options.

 

That got him looking for education and, after a couple of false starts and a pretty good amount of money spent, he arrived at Option Pit in June 2014. We did have a good laugh about that, as he could not remember exactly how he got here. But all’s well that ends well!

 

In any case, Scott moved quickly through OP Gold and into Platinum (now Trading Legion and Pro, respectively).

 

Scott is an accomplished computer programmer, with multiple degrees in that discipline, and most of our Pro sessions were built around developing trading tools via spreadsheets for finding volatility edge.

 

For those of you who are newer to trading, these are tools that look to exploit options pricing for calendars, butterflies and straddles. And they’re among the more advanced skills a trader can gain in Pro. So it is not a shock that when I wanted tools for Edge Hunter, I looked to Scott to help develop them

 

As Scott approaches his seventh anniversary with Option Pit, he says the biggest benefit he’s gained is how to make a living. 

 

As a retired air traffic controller, he trades for income — and to supplement his golf habit. 2020 was one of his best years as he learned to use downturns to his advantage, avoid drawdowns and look for opportunity.

 

That is the story. If you are using Edge Hunter to make some dough, you can thank Scott for making the sheets!

 

And if you have questions, or would like to learn more, give our customer care team a call at (888) 872-3301 Monday-Friday between 9 a.m.-5 p.m. EST. Or reach them by email at support@optionpit.com.

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 was able to close the SPDR S&P 500 ETF Trust (Ticker: SPY) May21 421/431 call spreads at 1.30 and book a 25% gain.
      • The Invesco CurrencyShares Euro Trust ETF (TIcker: FXE) is moving counter to rates so I will look to close the calls — which are up 15% — this week and then exit the puts which are suffering. This was a play on FXE going lower with 110.89 as the Apr lows.

The Power Income 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 option expertise.

My next stock on tap is TPI Composites (Ticker: TPIC). The company makes windmill blades and has had $17.30 to $80 run to $44.48, with a sharp move up Friday. I am leaning towards a long strangle but with some time to it as TPIC is very volatile.

TPIC 1 year candlestick on top and 90 day realized vol purple on the on the bottom

The Power Moves Portfolio Starting Lineup
Here are the current open positions …

Volatility Edge/Volatility Trading Club:

The Option Pit VIX Light is still yellow and Mark will flip to red if we have a quiet weekend and Monday opening.

 

Vol Edge Trade No. 88:

      • Buy to open 5 VIX May19 25-32.5-40 call flies for $.60 with a $.65 top and buy to open 5 VIX May19 20 puts for $.35-filled $.62 & $.35 
      • Mark closed the puts for 1.20 so the trade is up 25% and still owns the upside call butterflies.

 

VTC Trade No. 246

      • I own the VIX Jun16 30/45/60 call butterflies and Jun16 20 puts. I paid 2.15 for the trade and the VIX Jun16 20 puts were trading 1.90 on the close, so I sold some puts at 1.60 for a 33% gain Friday.
      • If we have any more drop in VIX, I will end up with my VIX call butterflies for a credit. The trade is running up 20% right now.

 

iPath Series B S&P 500 VIX short term VIX futures ETN (Ticker: VXX) 5-day chart

 

In the Vol Trade Club, Trade No. 245 is up 20% and owns 5 VIX May21 35.5 puts for a credit. If VXX goes really red, I can see a 100% profit here with VXX at 35, which is where it was last week.

 

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 opened an Exxon (Ticker: XOM) Jun04 61.5 call for $1.20 on Friday that is looking promising — up 15%.

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

To Your Trading Success,

AG

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.