It’s been a week.

On one hand, I had a great time meeting subscribers at the RagingBull Traders Summit on Monday and Tuesday, and hanging with Pamela and Noah at the Magic Kingdom afterward.

However, I’d be lying if I said the stock market getting obliterated this week didn’t rain on my parade.

Like so many other traders, my portfolio took a hit this week, as stocks face-planted on raging fears about the spread of the coronavirus.

President Trump tried and failed to alleviate some of those concerns, holding a press conference Wednesday night, but his appointment of Vice President Pence to lead America’s fight against the virus didn’t help; the Dow dropped more than 1,100 points the next day, and it’s getting crushed again today.

Of course, giving back a month’s worth of gains in just a few trading days hurts… 

But you know what?

As I told subscribers of Weekly Windfalls, Jason Bond Picks, and Jackpot Trades earlier this week — sometimes even All-Star hitters get in slumps and need to go back to the tee for batting practice.

And if there’s one thing I’m not, it’s a quitter.

If anything, this flush in the stock market will give me — like so many of the stocks I study — a chance to REST and then RETEST and get back to my BEST.

That said, one of the first swings I’m taking on my mission is a high-probability trade (for more than one reason) on market volatility.

 

The Bear Call Spread

 

The thing I love most about options, and our Weekly Windfalls strategy in particular, is their versatility.

If you believe a stock or ETF is going to go higher, you have several options (no pun intended). You can buy the shares outright, you can buy a call option, you can put on a bull put spread… 

There are so many strategies to suit your risk appetite, trade setup, capital, and so on and so forth.

Options also provide a lot of flexibility on the bearish side.

Instead of short-selling a stock or ETF, which comes with a TON of risk, you can buy put options on shares you expect to decline…

Or, in times of broad-market FEAR (like we’re seeing now), you could capitalize on elevated option prices and become an option SELLER.

No, you do not have to first buy an option to sell it.

Also, when you sell an option, you typically don’t want to do it “naked.”

I don’t mean literally, of course — you can trade however you want inside your own home lol — but I mean without protection.

 

^^when it comes to shorting options, I’m a “never nude”^^

 

Simply selling a call option, for instance, without another leg on the trade (“naked”), also comes with a ton of risk.

BUT, if you sell a call option, and then BUY another call option as a form of “insurance” on your bearish position — aka – putting on a BEAR CALL SPREAD — your risk is relatively minimal and PRE-DEFINED.

Here’s how:

 

 

  1. Find a stock or ETF that you expect will stay below a certain level within a set timeframe. 
  2. Centering your option series around that time frame, SELL A CALL OPTION that aligns with your expected top. So, if you expect the shares to stay below $100 through mid-March, you might sell a 100-strike call option expiring Friday, March 13.
  3. To protect your trade in the event the shares rocket beyond your sold strike, BUY A CALL OPTION at a higher strike, in the same series.

 

Risk & Reward

 

Risk on the trade is calculated by subtracting the net credit on your spread (what you received for your sold call minus what you paid for your bought call) from the difference between your sold and bought strikes.

Your profit potential is capped at your net credit, which is the difference between what you received for your sold call and what you paid for your higher-strike call.

 

 

For this reason, option sellers can really come out ahead during times of market panic.

That’s because when Wall Street is scared, expectations for volatility skyrocket — as measured by the Cboe Volatility Index (VIX) — and option prices tend to explode.

Because a VOLATILE stock is one that could make a big move, giving more option strikes a chance to finish in the money.

 

Shorting UVXY

 

Fear also tends to drive several VIX-related products higher, including the ProShares Ultra VIX Short-Term Futures ETF (UVXY).

Unlike stocks, when you buy shares of UVXY, you’re not buying into a company that makes something.

The UVXY is a leveraged ETF that, in the simplest terms, was designed to trade at 1.5 times the daily return of VIX futures. (It’s way more complicated than that, but I’m not trying to lull you to sleep here.)

But a few things you should know:

  • Due to the way it’s set up, the UVXY regularly suffers MASSIVE value decay — it’s essentially always going lower. The exceptions to this are during big VIX spikes, like we’re seeing now.
  • In fact, because UVXY is basically in a constant downtrend, the shares have reverse split several times since the ETF’s inception.
  • Because of all this, UVXY is NOT a typical “buy and hold” investment. Most of the speculation comes in the form of shorter-term options trades. That’s because if you just bought shares of UVXY, most of the time you’re going to lose money.

 

 

While the ETF is usually in a downtrend, that doesn’t mean it doesn’t have bulls.

A lot of money has been sacrificed by bullish traders trying to time a market crash by purchasing UVXY call options. 

While that strategy clearly worked out for those who timed this week’s slaughter, I’m rolling the dice that volatility — which is ALWAYS mean-reverting, remember — will start to settle soon.

Therefore, in Weekly Windfalls, I put on a few UVXY bear call spreads with options expiring in the next couple of weeks.

If stocks start to simmer soon, the UVXY should start to implode (again), and I can pocket the money I received from the call buyers on the other side of the trade.

So, I would not only capitalize on the built-in decay of the ETF itself, but on the time decay of the options as they approach expiration.

 

Closing Statements

 

I think my UVXY trade will work out really well if the markets level out soon, especially due to the DOUBLE DECAY from the ETF itself and the options. 

And I have to think stocks will take a breather soon… this level of selling is unsustainable.

Also, I have to imagine the Federal Reserve steps in at some point. If the Fed jumps in and cuts rates, I’d expect the stock market to whipsaw.

But no matter what happens, one thing is certain — options give you the POWER and LEVERAGE to make money in ANY market environment.

As for my trading, my plan is to take some more batting practice at the tees and come out swinging again in March, one position at a time.