Well, we finally got it.
After spending two months in a tight range, the markets resolved to the upside.
Dow 20k got hit.
The S&P 500 is just a couple points away from 2300.
And stocks left and right are hitting all time highs.
Two thoughts on this market.
First, it does not make sense to start going “all in” by selling bear call spreads. The implied volatility on call options is quite low so the premium you receive on selling call spreads is also low. Further, it means that you’d be selling call spreads with a strike price closer than what you’d need to justify the risk/reward.
We just haven’t seen enough upside movement to justify it. There may come a time to do that, but it’s still early… we’re on day 1 of a market breakout.
Second, eventually retests happen. If you have a few minutes, go look at the S&P 500 when it makes new highs. It’s a high odds bet that eventually we will see some kind of a pull back to these levels.
That means you don’t have to chase. You don’t need to force your way into the market. As a Proactive Trader you should let the setups come to you.
With that in mind, we’re going to look at two new setups… one in the VIX. It will be a little advanced and a slightly different strategy from what we normally look at, but it’s still a good opportunity here.
Trade #1: BA
The stock had a volatility pivot on earnings. It’s a very high odds bet that it will see PEAD (Post Earnings Announcement Drift). We can take advantage of that by selling put spreads with strikes just underneath the earnings gap, and then using 155 as a stop loss level.
Expected Price: 167
Sell to Open BA Mar 155/150 Put Spreads
Tier 1: Enter at 0.50, Exit at 0.10
Tier 2: Enter at 0.80, Exit at 0.50
Tier 3: Enter at 1.10, Exit at 0.80
Extra Risk Management: Stop out of the trade on a close under 155
Trade #2: VIX
This one is a little advanced, but this opportunity doesn’t come along very often. The spot VIX closed under 11. And the VVIX, which measures how expensive VIX options are… that also came into new relative lows.
It does not make sense to try to fade the market with getting short a bunch of stocks… but long volatility makes a reasonable and cost-effective hedge against any existing long positions.
Expected Price: 14 (Looking at Mar VIX Futures)
Buy To Open VIX [22 Mar 17] 15/20 Bull Call Spread
Pay attention! This is a bull call spread, not a bear call spread so we are buying at a debit instead of selling at a credit.
Tier 1: Buy at 0.75, Sell at 2.00
Tier 2: Buy at 0.60, Sell at 0.80
No Tier 3
Assume Full Risk On The Trade