Over the last 2 weeks we have seen global markets get crushed due to coronavirus.
We are in the midst of a historic move lower in equities and move higher in the volatility products. Markets are pricing in extreme fear due to the spread of the coronavirus.
To take advantage of the current extreme volatility readings in this market, we are looking at selling a call spread on VXX for our Options Trade Of The Week.
Selling a call spread is a conservative trade looking for a move lower in volatility over the next few weeks. It allows us to stay active in the uncertain markets with limited risk.
VXX is an Exchange Traded Fund (ETF) that tracks market volatility.
Why Are We Taking This Options Trade?
Much of the recent volatility has been due to spread of the Covid-19 worldwide. While it’s a terrible situation globally, as traders we need to react to types of market conditions so we can continue to generate growth regardless of what the market is throwing our way.
With VXX tracking market volatility, it is product that we can use to take advantage of the extreme conditions.
Looking at the chart of VXX we reached a 5 standard deviation move on the upside. In other words we are extremely overbought. Less than .10% of all occurrences fall outside of this range on the upside.
With this in mind we are expecting volatility to begin to stall out or potentially move lower in the weeks to come.
Selling a call spread, in this case, will leave us with 5 ways of making money on the trade. I like this trade as extremes in volatility don’t tend to last more then a few weeks at a time. With the current extremes going on 3 weeks now we are due for a pullback.
Full Options Trade Details
For this trade we are:
- Using April monthly options that have 34 days left to expiration.
- We are looking to sell the April monthly 47/49 call spread for $.55 or higher
- This has us selling the 47 calls and buying the 49 calls at the same time for $.55 or higher. At the close on Friday this spread was trading for $.62
If we fill the trade at $.62 then our max risk on the trade will be $1.38 or $138 per spread. This is calculated by taking the $2 difference between the strike prices minus the $.62 credit received for putting on the trade.
Our max profit potential on the trade is the $62 per spread that we are collected for placing the trade.
We can make money from a move higher, lower, or sideways as long as VXX stays below 47. We can also make money from time decay adding up and from volatility decreasing. This gives us 5 ways of making money on the trade.
For a complete break down of our Trade Of The Week make sure you review the video below.
You will learn the details of how we are placing trade including how we plan on managing it from start to finish.
If you are interested in learning how to find these trades, feel free to contact me directly with any questions you might have. Mike@netpicks.com.
We will also be holding a free live training session coming up on Monday at 12:00 eastern. You can login to the training session using the link below. We would love to have you join us on Monday.