VIX AT ITS LOWEST....

Opportunity to long VIX

VIX is the measure of volatility for the S&P 500. For the past 2 weeks SPX has rallied up almost 5% and that had brought down VIX from the 20s to 18 last Friday. This was the lowest level it has gone for the past year.

Yesterday, was a small red day for SPX (down 8 points) and VIX closed at 19.07!! As we went to sleep last Friday, we missed the opportunity to long VIX at 18 but have no fear as it might retrace back on a strong green day for SPX.

WHY VIX?

VIX works on the inverse of SPX. SPX goes higher, VIX comes down and SPX goes lower, VIX goes up.

If you look at SPX, it is now trading at the top of that channel in green. It closed at 3999 last Friday after 2 weeks of rally. There is a possibility of a resistance ahead and yesterday’s small drop is hinting it might be facing some headwinds above 4000 level. In any case, as VIX is already trading at its lows, any red days will likely push VIX up quickly, as the case was on Monday, +1 point up with just a small blip down.

As for VIX, it traded at its 1 year’s lowest at 18 level. So we mark this as a low entry point.

More Opportunities Ahead?

Plenty…

Today the Producer Price Index (PPI) and Retail Sales was just announced. The forecast was a reduction of PPI by 0.1% but the actual reduction came out 0.5% which means final demand prices of goods have reduced. Besides that the retail sales also went down higher than expected, ie. Actual -0.5% vs forecast -0.1%. Both was positive to inflation control and as such the market may rally today.

What did we say earlier? VIX works on inverse of SPX. If market goes up, VIX comes down and hence, another opportunity presents itself if VIX trades below 18 once again.

What to watch for and when to trigger long VIX?

Firstly, let VIX go down below 18.

Then monitor the movement of SPX, if the rally persist to break above the green channel line on SPX.

When you see some fatigue in SPX, which will also be shown by VIX creeping back up, that’s the time we can long it. You need not long it on a red day, in fact best to long it on a SPX green day as that will bring you a lower entry price.

Duration, anything below 30 days would be fine, gives you more time to be right.

What options structure?

Cheapest would be a Bull Call Spread. DTE 15 Feb.

• Buy a ATM call

• Sell a OTM call 2 strikes above

Try to achieve a risk to reward of at least 1 to 1.3-1.5. Trade price 0.50 to 0.70.

As we are doing a spread, the max profit will only be achieved if VIX stays on or above the short call strike on expiry. As we are trading only on a Quick Bites trade, ie. quick POP, we can exit the trade with a 30-50% profit, unless we carry on the trade longer than expected, we may possibly go on a higher profit exit.

Watch for SPX if it breach above 4200 level, you may decide if you want to cut loss, or when VIX goes down further $2 from entry price.

Watch Traders Talk…

We covered the VIX trade on Traders Talk last Tuesday. Watch the replay here (24.00)

Subscribe to our weekly options trading newsletter.

DISCLAIMER

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options: https://www.theocc.com/components/docs/riskstoc.pdf

MYstyework is an Online Financial Literacy Educator and materials provided is solely by MYstylework and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. MYstylework, through its contents, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. MYstylework is not in the business of transacting securities trades or an investment adviser.

CONTACT

support@mystylework.com