VTS Options - New Trade - Oct 9, 2019

VTS Options community,

Whenever volatility is elevated as it is now, options traders feel like a kid in a candy store.  We just want to scoop up everything.  The problem is, if you fill a portfolio with nothing but short Vega trades scooping up everything in sight when volatility is elevated, on those rare occasions when the market does have an unexpected crash to a further leg down you can quickly find your portfolio strongly in the red.

I always try to exercise extra restraint during elevated volatility as to not get over exposed to the downside.  So I know a lot of you have been emailing me trade set ups that look great right now, and I agree, they do.  The problem is as I said, nearly everything looks good right now, so we have to scrutinize the trades and only take the very best.

I do always like to carry some exposure to short volatility, so for me that's going to be my choice for today:

We can see that out of 9 monthly options expirations in 2019, UVXY has had 7 that expired below the previous month, and 2 that were above it.  

This is what I call the "Vol Step" strategy

It is simply selling Call Verticals  (or sometimes buying Put Verticals)  to capitalize on the fact that most of the time UVXY "steps down" to the next monthly expiration.  I do use stop-losses though for when we get caught in a vol spike.

Trade Details:

Short Call Vertical  (UVXY)  -  Educational video down below

SELL to OPEN 15 Nov 19' UVXY 29.00 Call BUY to OPEN 15 Nov 19' UVXY 32.00 Call

November contract has 37 days to expiry

Current approximate credit:  0.93$

* prices move around intraday, so the higher the better

Margin Requirement:

Short Call Verticals are limited loss trades, with the margin requirement equal to the strike gap - the premium collected multiplied by the options factor of 100.

( 3.00  -  0.93 )  *  100  =  207

The margin requirement per contract is 207$

Risk Management:

I'll use both a stop-loss and a stop-gain here of 50%.

Stop-loss:  1.5 x premium  =  0.93  *  1.5  =  1.40

Stop-gain:  0.5 x premium  =  0.93  *  0.5  =  0.46

* I'll send an "Update" email when it's time to close the trade, but feel free to monitor it yourself and close it when it hits either of those levels.

Allocation Size:

This will depend on your own level of risk tolerance.

My personal allocation for this trade will be 5%

The Greeks:

Delta negative  -  A bearish trade because we want UVXY to go down

Theta positive  -  As long as the UVXY remains at or below the current price, Theta will work to our advantage.

Vega negative  -  Neutral to start, but overall the trade will benefit from decreasing volatility

Volatility Metrics: (click them for explanations)

VTS Volatility Barometer:  72.67%

VIX Index:  18.98

M1 VIX future:  19.05

SPX HV(20):  12.82

Current Open Positions

Educational video:

* All information, analysis, articles, and videos in this email are provided for informational purposes only.  Nothing herein should be interpreted as personalized investment advice as I make no recommendations to buy, sell, or hold any securities or positions.  This email is available "as is" with no warranty or guarantees of its accuracy, completeness or currentness.  If you rely on this email or any of the information contained, you do so entirely at your own risk.  I do not hold myself out as a financial advisor and nothing herein is a solicitation for any fund or securities mentioned.  Although I may answer general questions about the information, I'm not licensed and registered under security laws to address your personal investment situation.  Past performance is not indicative of future returns.  Any and all financial decisions are the sole responsibility of you the individual.