$VIX kicks calls…

I gave Gagelle a rough time about buying call options for this rally earlier, but in reality, I wanted to know what you all were thinking, because I am having a hard time figuring what the most profitable way to trade this rally will be.  By nature, I am directional, so trading Iron Condors or Butterflies just hasn’t really appealed to my trading style.  So moving forward, I have about 3 choices: Buy stock (which is great if you have unlimited capital), buy deep ITM calls (again, which is great if you have unlimited capital), or sell bull put spreads (which is great if you want to limit your reward).

But when I saw the SPY options the other day that I know all of you would be buying and I saw this…I almost puked.

Say what!?!?

This picture was taken today, with the $VIX a little bit lower than it was on Friday, but come on!  I can’t pay $6 for time value on SPY options.  That is horrible.  Here is a little option math.  If I buy the ATM 85C on SPY, I can pay about $6 or $6.10 for it.  That is ALL time, about $0.25 a day for holding your option.  Now, price in that you need to see the SPY at or above 91 JUST TO BREAK EVEN, and you can see my issue.  If I wanted to see a 100% return in my option, I would need to see at least 97 on SPY.  Not that this move is unreasonable, just that I would really need to see well above 91 before I start making any money.  That is factoring in NO volatility crush.

That said, I think buying call options is out, unless you MAKE SURE your option has a very manageable amount of time for an ITM option (i.e. SPY options no more than $2 in extrinsic {and $2 is a lot}).  Buying stock would work well if you had plenty of capital.  Lots of the institutions have been using the double index ETFs (QLD, DDM, SSO), where leverage is 2:1.  Otherwise, Mole and I are compiling a nice list of beaten stocks for you to take advantage of.  We will release it once we think we have gotten closer to the bottom.

That said, where do we stand tonight?  Per usual, there are two-three nice looking counts.  Those would be the triangle still in progression, or that the markets move lower either directly, or after another wiggle higher.  From the pattern that I had seen until the final 1/2 hour, I would have leaned more towards one wiggle higher, but that close was pretty rough.  As it stands, I would rank a direct decline, a rally-then decline, and then the triangle in order of probability.   If we rally, we would be looking for a level between 8800-9000 (that still hasn’t changed, and is the same whether we are in the triangle, or about to decline).  If we start dropping, we would be targeting our previous lows (7900) and then the range of 7500-7000.  Easy enough.

$INDU options

Another viable option would be an ending diagonal that I suggested earlier, which is most prevalent in the $NDX.

Big Divergence

I would recommend selling off put positions on the way down as institutions will likely step in every 2%-3%  or so, making this a very choppy ride.  Breadth has been strengthening across a broad number of indicators.  So while I think there is still some down-side below us, I think you should be quite cautious, as a bottom could be near and the snap-back rally will be pretty big and likely, very fast initially.

Skål!