New Trade - With A Twist

New Trade - With A Twist Hello Smart Option Sellers! Happy Valentine's Day. Let's start with a new trade. This one is different though... We're going to take advantage of the volatility that has entered the market by entering a bearish call option spread. What's that? We're going to sell a call option and simultaneously buy a second call option, giving us an "option spread". This will allow us to enter into a limited risk, limited reward scenario. As we've witnessed over the last two weeks, the stock market has had some of the biggest drops on record in a very short period of time. And we've had some good snap-back rallies as well. This heavy back and forth movement creates massive volatility and erratic-ness in stock prices, which in turn pumps up the volatility component of an option's price. Bigger volatility creates more expensive options, which is great for us option sellers. But today we're going to make a direct trade on volatility itself. Over the years, when markets fell and volatility spiked, the event didn't last very long and those who would take a bearish position on volatility itself, made out handsomely. The spikes in volatility are very strong and very quick, and then falls just as quickly as the market comes to its senses and drives stock prices back higher. Most people associate the volatility in the market by looking at the VIX. In that link, you can see how the VIX spiked to 50 very quickly last week and has fallen just as quickly. We can make money on the VIX falling back to its recent range of 10 by executing a limited-risk bearish call option spread trade. You can't trade the VIX directly, so you have to use a different vehicle. In this case, we will be taking a position in the IPath S&P500 VIX Short-Term Futures ETN (VXX). The VXX is basically a stock or ETF (technically an ETN) that you can use to make a play on volatility itself. The thing ab