Everybody is John Wayne when VIX is under 14, including me. It’s a no-brainer to bet on the VIX rising some when it’s at these paltry levels. Not to mention 5 year lows. It takes a brave, brave man to forcast the VIX will rise when it’s under 14 ( just joking). I will take a different slant today. Instead of talking about a trade idea in the VIX, where most will make their bed, I will choose SPY (you could also use SPX options). Background first: Remember my friend, for the VIX to rise to the 17-18 area or higher, what way do we need the market to go? DOWN!
Trade idea: SPY approximately $146
Slightly Bearish Put Calendar
Buy 1 SPY November 144 put and sell 1 SPY October 144 put for $1.07 debit.
What does this have to do with calling for the VIX to go up? If the price drops in SPY, VIX should increase and this trade can make dollars from price movement and option volatility increasing. What do you mean? I’m looking at this trade around 2 pm central today ( Friday). If I look at this trade on Tuesday’s date with the volatility rising one point ( extremely conservative), I could make around 12-14% without commissions if the SPY is roughly between $142.6 and $145.6. The option volatilities are so low, any downward movement will propel them up and help the calendar trade.
If we go down near our short strike of $144, not unrealistic by any chance, my yields without commissions would be near 20% if option volatilities increased 2 points. Just for clarity, my yield is based on my cost, just like a long call. If I pay $500 for a Calendar, 20% yield would be $100.
What if I’m wrong? Again looking out to Tuesday, if we were to trade around 147.50 , I would add an additional calendar at the $148 or $148.50 strike.
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Keep working on the craft!
Dan Sheridan email@example.com