OPTIONS

As earnings season starts ramping up, trader Greg Loehr of OptionsBuzz.com shares details of an options play for when the market makes a move.

Stock: SPY trading at $145.96

Outlook: Pop in volatility; or a move; or both

Reason: The VIX is low; and the volatility of the VIX options is the lowest it's been in the past two years, and it's moving higher. With earnings upon us, this market is setting up for a move—either higher through resistance, or lower with a rise in vol.

chart
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Volatility:
The VIX is hanging out in the mid-13's...which isn't going to last. The only question is “when is it going to pop?” The volatility of the volatility is also the lowest it's been in forever, and it's moving higher. See chart below. That's a prediction for rising vol going forward.

chart
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VIX chart showing the option implied vol at the bottom

The Trade:

  • Buy To Open 10 SPY Feb 142 puts, and

  • Buy To Open 10 SPY Feb 148 calls,

  • As a strangle

  • For $2.48

  • Max risk = $2.48= per share; $248 per spread

  • Huge

  • Break even points = irrelevant

  • Percentage of portfolio at risk = 2.5%; just nibbling; may add more later

chart
Click to Enlarge

chart
Click to Enlarge

Trade Plan:
Question is “why buy a SPY straddle instead of buying a VIX call?” You could buy a VIX call, but the strangle might better survive a “stupid rally” if Wall Street doesn't fall apart through the next week or so of earnings releases.

Loss Exit:
Don't lose more than 25% of the position, which would take the strangle down to $1.86. If that happens, you probably want to close it.

Alert set at $2.00 or below as a "heads up."

Profit Exit:
I'm not specifying a profit exit just yet because I may add to this position if it turns out that volatility is indeed moving higher.

Notes/Adjustments:
I may add to this position, or sell other options to reduce risk.

By Greg Loehr of OptionsBuzz.com

Tickers Mentioned: Tickers: VIX, SPY

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