Will the Taper Tantrum Pick Up?

Yo Pit Crazies,


Happy Father’s Day to all the Dads!


That’s a very nice necktie you have there.


Now to reality …


The Fed tried to talk tough again last week.


It’s possible that they care about how much debt the US is accumulating and are getting nervous about the latest spending proposals from the Biden administration.


The Fed might even want equity prices to pull back (though they won’t say that).  


The conventional wisdom is that higher rates are bad for equity prices, but I recall stocks got pretty high in 2000 with higher rates …


Those were the good old days when US government debt was shrinking every year as a percentage of the economy.


There’s potential for two entirely different ways to view the Fed getting back to normal.


That creates volatility.


But there is a place in the markets where traders can go to see how other traders think …


To get a sense of the sentiment and lay of the land.


Right now the signal is a bit of a surprise.  


What Is the Indicator?


The VIX term structure curve shape is the sentiment. (And I cover it in detail in the Volatility Trading Club every week.)


VIX TERM STRUCTURE from VIX Central.com 


What has it done for me lately?


Well, leveraging the curve, I am up 11 of the last 13 trades, with six wins in a row.


That’s a Father’s Day heater!


How You Can Use the Curve


Reading the term structure is pretty easy. There are two key parts.


      • Curve shape
      • Curve relative to VIX cash


Part 1: When the curve slopes up from left to right, that is known as contango. And it means shorter-term volatility is cheaper than long term volatility.


Part 2: When the entire VIX future curve (blue line), is above the VIX cash (green dotted line), it means the forward volatility expectations are higher, which is the normal condition 80% of the time. For more on that, check out VIX Made Easy webinar series.


Both of those things need to be in place for S&P 500 Stock (Ticker: SPX) volatilities to be relatively benign.


As long as future volatility is more expensive than current volatility the market expectation for short term movement is lower.


BUT when the green VIX cash line moves up into the futures, it means traders are getting nervous.


Why? Because short-term volatility is increasing, and traders expect VIX to make a big move, up or down.


That is the position I set up in the Vol Trade Club last week:


      • I bought 6 VXX June 25/July 09 30-strike put spreads on the contango VIX
      • I bought 1 VXX July 09 35.5-strike calls in case the VIX cash rockets this week


More on that in the Rundown below.


My Take: The market got nervous and VIX moved from a 16 handle to 20 handle in 3 days last week. SPX, however, didn’t sell off that much, only 70 points from all-time highs. That’s less than 2% in 3 days.


Hardly a panic.


The Rundown


Power Moves Portfolio w/ Frank Gregory
Option Pit DC and Wall Street insider 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 options expertise.

The live trade log is here, and I’ll have a full recap for you every Wednesday.

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


The tone of Pro was only moderately bearish last week waiting for how Monday shakes out.


Some ideas from around the room:


      • SPDR S&P 500 ETF Trust (Tickler: SPY) July 02/July 16 400-strike put spreads for $1.38
      • Netflix (Ticker: NFLX) Jun 25 515-/500-/585-strike butterfly for $6.20


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

      • Mark added a squeeze play in ContextLogic (Ticker: WISH) buying June 25 12-strike calls.
      • If you missed our Short Squeeze series last week, check out Part 1 and Part 2.

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.


My long term General Electric (Ticker: GE) position closed Friday with a total 50% gain.


      • Fastly Inc (Ticker: FSLY) long strangle was up about 2% on Friday, as the stock looks like it is ready to take a run at $70. I held out selling some calls on Friday after FSLY made a short-term high.
      • I own some legacy July 02 puts in ARKK Innovation ETF (Ticker: ARKK) that might have a second chance.

Volatility Edge/Volatility Trading Club:
The Option Pit VIX Light is still red, and the Cboe Volatility Index (Ticker: VIX) broke 20 and is in Zone 3 solidly.

At this point, SPX will have to have a solid down day on Monday for VIX to stay at this level.

For the Volatility Trading Club:


      • Both Trade No. 248 and No. 249 are open and up 10% and 15% respectively while owning upside VIX. I started to close some Friday. If VIX explodes, I can see gains of well over 100%.
      • My new idea is buying the iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) June 25/July 09 30-strike put spreads for $.85 with a call hedge. If VXX explodes up, I’ll just keep rolling the call up. This trade has positive decay working for me. 


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

To Your Trading Success,


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