top of page

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 about this security is that because of the way it's structured, it has a long-term downtrend bias to it, which will make it even better for us as a shorting (bearish) trade. I know I've hit you with a lot of technical information here, but here's what we're going to do: Sell (sell-to-open) the VXX June 2018 $45/$46 bear call spread for a limit sell price $.30 per spread or higher, GTC, as an opening transaction (sell-to-open). Now, I'm sure many of you might not have sold a call option spread before. In this case, due to the bid/ask spreads of each option (the $45 & $46 calls), it is imperative that you enter the play as a single spread order instead of trying to manually buy and sell each call option individually. In the spread, you will be selling the $45 call option and buying the $46 call option for a spread price of $.30 per spread. For instance, the $45 call option has a fair value of roughly $9.10 per contract, and the $46 call option has a fair value of roughly $8.75 per contract. To calculate the spread, you subtract the $46 call's price from the $45 call's price, which equals $.35 per spread. You would place your call spread order for a sell price of $.35 per spread. If you need help, please consult with your broker. Right now, the spread has a fair value of $.35 per spread, so I'm hoping we can get fills done for at least $.30 per spread. Remember, you're selling the spread, not buying it. The risk/reward is as follows: The most you can make on this trade is $.30 per spread ($30 actual per spread). The most you can lose is $.70 ($70 actual per spread) per spread. It is limited risk, limited reward. It is not an open-ended risk like our naked put-sell trades. You can decide how many spreads you want to enter based on your comfort levels. My thought process is that by the time June rolls around (probably much, much sooner), volatility will have eased back to much lower levels as the stock market will have rebounded greatly by then. As long as the VXX is below $45 by June (it's at $44.60 now), we will make the maximum profit of $.30 per spread. That's all for now. Get those trades in there and let us know how you do. Continue to hold all other trades as-is. Continue to contact me here Regards,

Lee Let's Grab That Cash!

Recent Posts
bottom of page