Where Are We At?

Trade:  buy to open 3 ZM May 130 put for $10.50, Sell to open 6 ZM May 115 put at $5.10, buy to open 3 ZM May 100 put for $2.20, pay total $2.50

Markets are marginally positive today.  This would make 4 days of buying in the last 5 days,  which sounds like a lot till one sees how many days in a row the market absolutely got mauled by sellers.

The market is now down a little over 20% from the highs.  2700ish would make it down almost exactly 20%, an interesting target for today if the markets get a head of steam.  That said I am extremely wary of where buyers go tomorrow when we begin a new quarter. I think some sort of retest is inevitable given the current price action of the market.  Despite that belief I am a seller of puts in names I really like and even a strategic call buyer in the right stocks.

Looking at the VIX itself, it DOES appear to be slowing.  The VIX is finally below 60 and vol of vol (the VVIX) is falling.  The second chart with the red line below is a proxy for VVIX if not the the exact calculation:

However, until we see a real drop in SPX volatility, VIX is going to stay in the 40s and 50s,  which could be a while. For example if the SPX movement falls to ONLY 2% a day (ha only), the VIX could still trade in the 40s as there will be a HUGE risk premium built into options for months.

In addition, despite the run in the SPX the VIX is backward which makes anything but short runs in the SPX hard to believe in:

For the time being,  our traffic lights are all yellow,  meaning every trade needs to be strategic.

Option Pit Traffic Light

SPX:  YELLOW

SPX IV:  RED

VIX:  YELLOW

VIX IV:  RED

VXX:  GREEN

The Trade:

There are winners and losers in this market.  When we get stock recoveries and people see the ‘winners’  of the post Covid-19 economy the tendency is for money to PILE into these names.  This is why a company like ZOOM has been off to the races. It makes sense, my 3 year old just had a 3 year old pre-school session on Zoom.  My 10 year old has class everyday on Zoom, and my family is having family time once a week on Zoom.  

Listen I love the product, I use it every day and have for over a year.  I question how permanent the gains are in education and more importantly with ‘recreational’ use.  Certainly they will pick up some permanent corporate subscribers, not to the point of having a 45 billion dollar market cap.

You guys know I like the product a lot.  But the valuation is out of hand on this name.  I think when the market sells off (which I think it will)  ZM will get face punched as dollars leave to buy cheaper stocks.

In addition, as we come out of quarantine I think this stock is going to see a lot of pressure.  The IV is exceptionally high right now (as many stocks are).  

What is interesting is that calls are actually more expensive than puts and WAY out of the money puts are actually pretty darn cheap.

A flat downside curve out of the money puts cost no more than near the money puts in IV terms is perfect for bearish butterflies.  It also allows me to ramp up the leverage. 

The 130-115-100 puf fly in May only costs a little over 2.00 and takes full advantage of the relative cheapness of the 100 puts.  I can buy 3 of them and spend only about 650 bucks. On this trade I would be looking for ZM to pull back to the 120-130 range at which point I would be looking to exit this trade.  

Obviously, the risk here is that ZM runs higher for a continued period of time.  These May puts DO have some time, thus I am willing to be patient, especially given how volatility the market has been.

Trade:  buy to open 3 ZM May 130 put for $10.50, Sell to open 6 ZM May 115 put at $5.10, buy to open 3 ZM May 100 put for $2.20.

My target for my sales are $2.90-$3.00 with us letting 1 put fly ‘run.’  If ZM makes a pop higher I will use some sort of adjustment.

Your Only Option,

Mark Sebastian

The materials presented from Option Pit LLC are for your informational and educational purposes only. Option Pit LLC nor its employees do not offer investment, legal or tax advice of any kind, and the analysis displayed with various tools does not constitute investment, legal or tax advice and should not be interpreted as such. Using the data and analysis contained in the materials for reasons other than the informational and educational purposes intended is at the user’s own risk. Option Pit LLC is not responsible for any losses that may occur from transactions effected based upon information or analysis contained in the presented materials. Specific trading ideas or strategies discussed in the presentations or materials are entirely illustrative and do not constitute a solicitation of a transaction (or transactions) or recommendation to execute a particular transaction or implement a particular trading strategy. To the extent that you make use of the concepts with the presentation material, you are solely responsible for the applicable trading or investment decision. Use caution when entering any option transaction and it’s recommended you consult with your financial advisor for investment, legal or tax advice relating to options transactions.

One Reply to “Where Are We At?”

  1. My trading account is so low, I could only purchase quantity one of the ZM put fly. I must say I really appreciate your talent as you are helping me stay afloat. I have been fighting to get my account up above $5K, but it has been difficult. I was down to $3.9K when I started with the Smart BETS and the Vol Edge services. I had started out with $12K and was pretty depressed about how my equity line was sinking. I took the very first trade you recommended, that wasn’t an official trade, with the Jan 21 option trade on Boeing. I was up $700.00 at one point, only to see it fall and I wound up losing $1K. Lesson learned. I should have taken the $700 profit when I had it. I’m really loving your two services.

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