What a 25 VIX means to my Complete Options Portfolio –

The VIX is near the 25 level today. That means that the market’s fear level of a large move (the usual fear is to the downside) is the lowest it’s been since the beginning of August. Tomorrow may bring a different story, but for today we will welcome the stability. Reasons for this stability may include some resolution to European problems and anticipation of a Santa Claus rally like we have had in the past. Let’s take a look at how this may impact the different parts of my Complete Options Portfolio and maybe throw out a trade idea for each part. SPX is currently around 1217 and we haven’t been south of 1160 since October 7, stability usually brings lower VIX levels!

Speculative:  Putting on trades based on Directional opinion.

 With some of the market craziness temporarily waning, I would allocate less dollars to this part of my options portfolio. Still opportunities are out there, but nowhere near the movement we had from the beginning of August to the beginning of October period.

Speculative Trade Idea: SPY slightly Bearish Calendar,  Buy 1 February 120 put and sell 1 January 120 put for around $1.50 debit.

 I would use rallies to enter out of the money put time spreads to take advantage of temporary downside moves we should get even if we move higher. I would enter these spreads after the market has gone up a few days, and would put in a price below the mid prices a bit. Let it come to you. Don’t chase it. My plan would be to stay in the spread for about a week and get out for profits over 10% yield. My aim is to benefit from a price move and volatility increase if we have a few days of declining prices. If I’m wrong I could re-position the calendar and move it to a higher strike.

Monthly Income: Putting on range bound trades with probabilities in my favor like an insurance company. I would allocate near normal levels of capital to this part of the portfolio because the market is pretty range bound.

Monthly Income Trade Idea: AAPL Iron Condor, Buy 1 January 425 call sell 1 January 415 call , buy 1 January 345 put , sell 1 January 355 put for total credit of $3.50.

AAPL has been in a range between roughly 350 and around 420 since middle of July. This spread has breakeven points at expiration of around 350 and 420. If I think this range will continue over the next 25-30 trading days ,  and so this would make sense to me. The risk is $6.50. The credit of $3.50 subtracted from the strike width of 10, little less than 2:1. If the stock goes outside of my projected range, I would get out.

Long Term Monthly Income: Stocks I really like for next 2 years that don’t usually have crazy volatility. Preferably a little lower beta than the market. If I’m dealing with stocks that have been very strong, I might decrease my capital allocation a bit or get more downside protection if I think they will retrace a bit.

Long Term Monthly Income Trade Idea: IBM slightly bullish Diagonal: With IBM around 187 ½, Buy 1 July (2012) 160 call for around $32 and sell 1 January (2012) 185 call for around $7, for debit of $25. Since these are different months, the break-even is a little to calculate. IBM has been strong like bull! It may be a bit overextended but I like it for the long term. This trade I’m selling an in the money call to get a bit more downside protection over the next 25-35 days. The stock has been on a run and I think it may have a bit more to go down over the short term. This position does very well with IBM in the $180 to $188 range at January expiration. 

Dan Sheridan