Greetings Pit Crazies,
The Cboe Volatility Index (VIX) traded below 18 last week and stopped in its tracks.
Why does that matter, you ask?
What is in it for me, you say?
Didn’t you say last time that you would have a secret today?
All will unfold …
VIX tells you what the market is thinking … IF you know how to read it.
And VIX zone changes are always big, as I hinted at last week.
As a reminder, those are:
VIX Zones Sentiment
Zone 1: 9-12 VIX Happy days are here again and we’re very bullish
Zone 2: 13-17 VIX The market is getting frisky with some doubts
Zone 3: 18-23 VIX At least one macro event is causing worry
Zone 4: 24-plus VIX Major macro problems are leading to loss of confidence in stocks
Anyway, VIX recently went from Zone 3 to Zone 2 …
Meanwhile, the S&P 500 Index (SPX) is about to go through a major tone change and the perception of volatility could change in a big way.
Mark and I have been banging the drum on this. Implied vol needs to get to lower numbers to stay lower.
Why is that?
Think of VIX as a 30 day straddle in SPX. A straddle is a long call and a long put together as one trade. It is also the estimate for a range in SPX for 30 days …
Double the straddle and get the expected 30 day range.
As volatility drops, the straddle shrinks, the range contracts and VIX will read as a lower number. Less expected range, less expected move.
The big reason is realized volatility in SPX. That is simply how much SPX is moving day to day.
The current number is 17.30 for the last 30 day average. VIX is 18.12 as of the close Tuesday. If VIX dips below the 30 day realized volatility average, traders are expecting less volatility in the future
That is a big expectation change, as traders think volatility will be lower in the near term.
It’s also usually bullish — and it’s where the market is today. Right on the edge! Exciting, huh?
The straddle for any name or class of options is the market’s best guess for a range over a period of time.
How am I trading this?
Diagonal call spreads, these trades own an in-the-money option and sell a nearer term at the money option. Basically trades that work well with a drift in volatility lower. A stock can move trade still pays.hard in the desired direction,but the gains are capped and a stock can go nowhere and the
Bottom line: Fit the trade to the condition the market shows you. Follow the realized vol.
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.
And, yes, Mark has seven wins in his last 10 Sharp Bets trades. It never gets old.
He is riding three positions currently, up in Johnson & Johnson (Ticker: JNJ) and ViacomCBS (Ticker: VIAC) and (as of the open) down a bit in Nordstrom (Ticker: JWN).
The lower VIX narrative is that calls are getting cheaper faster, especially in the 30-day and in cycles …
So cheap calls can make fast money on a pop in the stock.
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.
We have just left VIX Zone 3 and are on the edge to drop further into Zone 2 — but we need realized vol to drop a lot in SPX. I have reduced most of my very short delta VIX/VXX exposure as VIX crawls lower.
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 put butterflies to take advantage of the slower grind down in VIX for May.
For the VTC, I am up in seven of the last eight trades. I changed my approach in February to focus on closing puts for cash and letting the upside VIX and VXX calls ride, and it has worked out very well after I rode my VIX and VXX puts too long in 2020 and greed was very costly.
Never too old to learn new things!
All could be closed today for gains between 5% and 30%. A big gain would come if VIX rockets, which it has not done in two months.
I am STILL waiting for VXX and Pro Shares Ultra Vix Short-Term futures ETF (UVXY) reverse split announcements. I am still leaning short BOTH VIX and VXX.
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!
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 ..
Since then, we have gains of 30%, 25% and 15%, and five open trades that are a little up and little down.
If they lose, the numbers should be 15% or less. Funny enough there has been very little opportunity to sell long puts in the last 2 months even with VIX above 20 most of the time. I was able to close most of them except for Apple (Ticker: AAPL).
I close two of the three AAPL call butterflies, the last one for a 125% return. Most likely I will end up with the puts I own for a credit.
We also opened a CME strangle that closed down around 5%. Bitcoin took a hit this week so I might have a chance to close the put side of the strangle first.
Robinhood Trader uses a proprietary Option Pit scanner to find order flow anomalies in the Robinhood trading activity.
Mark closed some Nike (Ticker: Nike) calls for 50% gain, Blink Charging (Ticker: BLNK) for a loss and he is riding Nikola (Ticker: NKLA) as the EV heats up again … mostly just up and down lately without gaining or losing ground.
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 big news was closing a lot of long VIX puts and SPDR S&P 500 ETF Trust (SPY) calls I owned coming into this week in the long straddle positions.
I had a 35% gain with very little real risk in the trade.
The tone has shifted in the room to long value stocks like Kinder Morgan Inc. (Ticker:KMI) and CVS Health Corp (Ticker: CVS), etc. and less of the Reddit/YOLO names.
The Pro Room produces about 30 actionable ideas per week. These were a couple of my favorites from the Roomies …
- Short Rolled puts in $KMI from 16 Apr 16 to 23 Apr 16.5 for 0.25 CR, looking for the dividend play coming April 29.
- CVS May 75 calls for 2.35 IV in CVS is very low.
Realized vol is the dog wagging the implied volatility tail, eventually. It works with any commodity, stock, ETF or other security out there.
To Your Trading Success,