Trade Update - VXX
Hello Smart Option Sellers! Before we get to the VXX update, I wouldn't be a good human being if I didn't comment on yesterday's school shooting in Florida. It's tragic beyond tragic. Being a father of three myself, in addition to saying goodbye to them in the morning, do I now have to say, "I hope you come home alive at the end of the day". I mean it's insane. The last place we would think that our kids are unsafe is in their own schools. Who would want to harm children? I'm sure many of you have children, and possibly even grandchildren. We can't let this become the norm in our society. We can't just think, "oh well, this is how the world works now". Not true! We can't let it be that way. I'm heartbroken for all those affected, and to think that life has to move on. How can those parents move on? I'm angry, sad, frustrated, you name it. I'm sure many of you feel the same. I don't know how many more tragedies like this have to occur before we make a move. I hope it's soon. VXX Trade (VXX) Ok, let's talk about yesterday's trade. For those of you who ventured in, we were successfully filled. When stock markets drop, especially when it happens fast and furious, volatility spikes immensely. But those spikes in volatility don't last long because we have such quick rebounds in the stock market. Volatility and markets move inversely to each other. If you follow the charts like I do, you will always see the V-shaped moves when volatility spikes and then drops quickly. It leaves an inverted V-shape on the charts. And although stocks don't always rebound in V-shaped fashion, the volatility drop itself usually does. This is because once cooler heads prevail, they realize the world isn't coming to an end, and the market stabilizes. You have to understand how psychology plays a huge role in investing. When we get a slow drip lower in the stock market, one in which people have time to absorb and make rational decisions about, panic and volatility stay subdued. This is because people have a chance to think logically about why the market is slowly dropping. But, when we get those massive, fast, intense drops lower of 1,000 points, no one knows what's going on and the first gut reaction is to panic. And that's what makes volatility spike. I hate to say it, but those are the kinds of moves that option sellers like me live for. It gives us a chance to take advantage of the chaos and panic. Not only can we sell put options for great prices during that panic, but we can also take advantage of selling the volatility component as well, just like we did with VXX. As I've stated before - the market always goes back up. Here's what we did: Sold (sold-to-open) the VXX June 2018 $45/$46 bear call option credit spread for an official sale price of $.31 credit per spread as an opening transaction (sold-to-open). The fills reported to us by Smart Option Seller members ranged from $.30 - $.33 per spread. For those of you who asked, it doesn't matter what individual price you received for each option. As long as the spread came out to a credit of $.30 or more, then you did the trade properly. I'd say a majority of you were able to sell the $45 call for about $8.65 per contract and bought the $46 call for about $8.35 per contract, giving the spread a value near $.30 credit. As far as the limited risk/limited reward feature, here's how those numbers break down: Just like our normal put-sells, the most we can make when selling an option is what we sold it for. In this case, our maximum profit can be the $.31 we sold the spread for. In order to figure out the maximum risk, we need to subtract our potential gain from the width of the spread. Since this is a $1 wide spread ($46 - $45 = $1), you subtract the credit of $.31 from $1 which equals $.69. The most we could lose is $.69 per spread. Both of those numbers added together need to equal $1.00 If the spread was $5 wide for example, and we sold the spread for $2.20 (maximum gain), then the maximum loss could be $2.80 per spread. Make sense? What levels in the VXX do we need to see in order to make maximum gains or losses on our new trade? Since this is a bearish play, as long as the VXX is below $45 at expiration, we will realize the maximum gain. If the VXX is above $46 at expiration, we will realize the maximum loss on the trade. If the VXX finishes somewhere between $45 and $46 at expiration, we can gain or lose differing amounts. I will alert everyone what to do once we get to that point. Great job everyone on a new type of trade for many of you. That's all for now. Continue to contact me here Regards,
Lee Let's Grab That Cash!