Yo Pit Crazies,
I like our Pro Chat room. There is a steady stream of trade ideas from me, Mark Sebastian and our Pro students, some of whom have been in the room for years.
Is every idea a winner? Nope.
But there are a lot of great ones that make a lot of money.
A good trading skill to develop is how to make an idea your own.
From any service, anywhere … how can a trade idea work for you?
It’s a valuable skill — and learnable — but there are steps.
Think of how golf pros are shaping shots around Augusta National this weekend …
That is a hint.
Mark had a great idea this week for the Pro Chat room and it made 125% in 4 days. How did he do it? There were two big questions:
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- Are we going to 4,100 SPX?
- And if we are, WHAT is the best trade to get there?
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It all comes together below …
The Masters and Trading
Think of the Masters golf tournament and how players select a shot …
It’s too different from how a trader creates a position.
The first step is outlook. You can’t trade options without an outlook, so set a target.
Golfers shoot at targets and traders should, too. It sets the tone for the position.
The second is condition …
The best golfers look at the pin and wind, green elevation and hazards — and shape their shot accordingly.
Option traders use volatility to help with conditions. (The Option Pit Traffic light describes just that). Use conditions to shape positions — then play the shot.
Mark bought an S&P 500 stock index (Ticker: SPX) Apr09 4,100/4,130/4,160 call butterfly for $4.50 — or just .1% of the value of the SPX at 4,100.
4,100 was the target and he chose the call butterfly because a one-week butterfly produces great returns for low cost in a lower volatility environment, especially this close to expiration. (Learn how to trade butterflies in the Trading Legion.)
So to recap: 4,100 was the pin, a low-volatility environment was the condition and the butterfly was the shot shape …
SPX ground higher slowly and the 4,130 calls melted to nothing, right around .25. Mark bought them back and then sold the 4,100s at $11.40, $12.50, $14.50, $28.60 for an average sale of $14.82.
$5,000-plus on a $2,225 investment — so 125% profit. Not bad for 4 days.
Pick the target. Identify the condition. Play the shot
The Rundown
Sharp Bets: Mark 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 has seven wins in his last 10 Sharp Bets trades. The streak is still alive!
He is riding three positions currently: up in Johnson & Johnson (Ticker: JNJ) more than 50% and in ViacomCBS (Ticker: VIAC), and down slightly in Nordstrom (Ticker: JWN).
Volatility Edge/Volatility Trading Club: Vol Edge is showing that the proprietary Option Pit VIX Light Is Red, which means Cboe Volatility Index (VIX) futures are in contango (futures price is higher than the spot price).
That means it is very hard for iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) to pop with such a high overhang of future premium.
VXX announced a 4-for-1 reverse split for April 23. I find it easier to exit those positions pre-split and then reenter since the liquidity in the new contracts is superior to the old contracts.
VIX is in Zone 2 — the 13-17 range — with SPX realized vol into the 12% range for the last 20 days.
For the Vol Edge, Mark has 10 in a row for wins and good discipline closing puts for money. Currently he just has some VIX strangle leaning short delta.
For the VTC, I am up in seven of the last eight trades. I closed part of trade No. 240 up about 50% and I am running a stop.on the balance of the trade if VIX runs hot again. A stop is a closing transaction in an open trade. Traders can stop gains or losses by executing a close once an option reverses direction from the winning direction to the losing direction. This helps to manage gains and keep losses small.
This is the best time in my view to own May VIX puts with an upside hedge.
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 changed the Trading Legion focus in mid-February to concentrate on longer duration trades that create a little room if I miss a close ..
I closed all three Apple Inc (AAPL) call butterflies, the last one for a 125% return, too. We ended up owning the puts for $50 and considering how short the position was at the beginning it was not the worst outcome. Option Pit’s Queen of the Candlestick Licia Leslie wanted to roll the call flies into calls and I should have listened to her!
Robinhood Trader
Robinhood Trader uses a proprietary Option Pit scanner to find order flow anomalies in the Robinhood trading activity.
Mark closed the last of the FuboTV inc (Ticker: FUBO) Apr16 22 calls for 61% return and the Carnival (Ticker: CCL) Apr16 26s jumped to a 116% gain.
There are several positions with a shot in Nikola Corp. (Ticker: NKLA), SOS Limited (Ticker: SOS) and Energy Transfer Partners (Ticker: ET). Mark rolled into some CCL small dollar Apr09 31 calls for .50 that fizzled.
It was a very nice week overall and Robinhood money is flowing into electric vehicles and oil again.
Pro Trading Room
This is Option Pit’s live access to Mark and myself during trading hours. Our Pro students post trade ideas with Mark and me all during the trading session.
The Pro Room produces about 30 actionable ideas per week. These were a couple of my favorites from the Roomies …
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- I posted an SPX Apr16/19 4150 call calendar for 2.65 with a protective put spread Friday afternoon that was up 25% by EOD. Very low IV for that calendar at just under 10% and something I expect to see more of this week.
- Buy to open Petroleo Brasileiro SA ($PBR) Apr23 9c @ .07 – YOLO
- I am noticing money going back into oil sensitive names, so that is a good sector to watch for the week.
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The Lesson
Trading involves a target and a way to get there. Picking the right position means it is possible to stay out of trouble even if the trade idea does not come off as planned.
To Your Trading Success,
“AG”