Volatility makes me happy… and its made me millions.
Other traders run screaming for the hills.
But not us – not real traders.
We stalk our prey day and night… waiting to strike.
As the moment hits… we pounce tearing profit limb from limb with ferocious savagery.
I’ve put 20 years of options knowledge and rolled it into one service—Total Alpha — if you’re not a client then join here.
After a long day, we return home, sharing the spoils…
… plotting our next hunt.
I know you thirst for more. And I don’t blame you.
So where do we go from here, now that the market has eclipsed all-time highs (yet again)?
Believe it or not, I don’t believe that this latest runup in stocks will have legs. Of course, I’m going to let the data and my money pattern dictate where I toss my bets. But I’d be lying to you if I wasn’t already preparing for a down turn.
In fact, there are three ways I think you can play the next volatility spike in the market. If played correctly, it could generate substantial returns for myself—and life changing for others.
First, the VIX isn’t a stock. You can’t trade it on the open exchange.
There are three main ways to trade the VIX: ETF products, futures, and options.
ETF products come in two varieties – leveraged and unleveraged.
VXX tracks short-term volatility through futures and other products. The ETF trades on the open exchange like a normal product.
However, because the VIX is mean-reverting, and futures strategies cost money to execute, the VXX loses value over time.
VXX weekly chart
The UVXY works similarly but as a leveraged product. This means it tracks the daily movements of volatility by twice the normal amount.
With the same costs as the VXX plus degradation from being a leveraged product, the UVXY erodes in price much faster over time.
UVXY daily chart
My favorite trades work with either options and/or stocks on the ETFs, or options directly on the VIX.
So let’s get to it, shall we?
- Covered calls
Good ‘ol covered calls never stray far from my heart.
They’re one of the first option trades we learn how to do.
Now, I’ll show you how to work them properly.
Timing this trade is the key. Jump in too early, and you bleed out slowly.
I like to use the VVIX as a gauge for potential volatility. When I see it starting to move higher, I take that as a signal for a possible spike in the actual VIX.
As a quick refresher, the VVIX is the VIX of the VIX. It measures traders’ activity on the VIX options.
Once I see the VVIX moving from the ’80s to the ’90s, I plan my move.
I like to do what’s known as a ‘buy-write.’ This is where I buy the stock and sell call options against it immediately.
It’s another form of a covered call.
My sweet spot is right at-the-money. That pays me the most extrinsic value possible on the trade.
I don’t like these trades to last more than a few weeks. If volatility hasn’t spiked by then, my timing was off.
The goal here is to have the ETF spike on a jump in volatility. That puts the options deep-in-the-money and converts the extrinsic value to intrinsic value.
Then, you simply close the trade and take profits.
Easy trade to execute. Timing is the biggest challenge.
- Long VIX options
VIX options aren’t my favorite option (pun intended). They can be very tricky to play, and may not pay out a lot.
But, done right, they have extremely high win rates.
This play relies on searching for extreme lows in the VIX coupled with lows in the VVIX. We actually saw this scenario recently.
VIX daily chart
You can see how the VIX got down near $12, which came very close to the lows of the year.
At the same time, the VVIX got relatively near its lows before turning around.
VVIX daily chart
This meant you could buy long calls in the VIX at extremely low prices for very cheap.
Since then, we’ve seen the VIX pop up nicely over $13, which could yield a solid profit.
- UVXY Call Spreads
This is another trade with a high win rate that pays handsomely.
The construction is pretty straightforward.
You want to sell a call spread at or slightly in-the-money when the VVIX gets up between $115-$120, the VIX is over $20, and the UVXY has spiked at least 40%.
It may seem like a lot at once. But, those criteria help you pick off the tops in volatility during market downturns.
You can see it in action in mid-august. The VVIX spiked up near $118, the VIX jumped over $20, and the UVXY nearly doubled.
UVXY daily chart
In this example, you would sell a call spread around $36-$38. You want to give yourself about 1-2 months on expiration.
That lets volatility get sucked out of the market at least once, putting you in a profitable position.
You don’t need to get full profit. If you manage to 25%-50% profit, you’re doing just fine.
This is, by far, my favorite trade to play. It may only come a couple of times a year, but it’s so easy and consistent.
These aren’t the only tricks I have in my bag.
If you’re ready to open up the toy chest then come join me at Total Alpha.
I’ll show you how you can become a multi-millionaire option trader.
If you want to learn a little bit more about my favorite chart patterns, check out the short clip below.
What are gravitational lines?
Jeff Bishop explains:
200-hour Moving Average
Great indicator for swing trades
Consolidation close to this line could indicate an entry point for a trade pic.twitter.com/bbmKX47Gxh
— RagingBull (@RagingBull) November 4, 2019