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Trade Alert – VIX Cake

August 21, 2013 by Cody Willard

Buying the “VIX” means that you’re buying market volatility and expecting either a pullback or more specifically that the markets are about to get edgy and make some big moves. The VIX generally trends upward when the markets trend downward and vice versa. Remember that chart I showed you last week when I bought a bunch of VIX call options, betting that the market’s volatility was indeed about to pick up? Here’s that chart.

Screen Shot 2013-08-14 at 9.09.20 AM

 

Here’s that chart updated include the last five trading days.

 

Screen Shot 2013-08-21 at 11.06.12 AM

That’s a 70 point decline in the Nasdaq there, which is only a couple percentage points. The markets’ recent pullback here has been stealthy rather than dramatic as stocks haven’t crashed but have certainly been trending lower. And that means that the VIX has indeed been trending higher conversely to the market’s downward trend.

Screen Shot 2013-08-21 at 11.08.46 AM

Now stick with me here as we pull it all together. We’re already up huge on the VIX call options that we bought last week. But we haven’t even seen a serious panic in the markets — just this downward trend. Which means that if the next panic arrives here in the markets while they are already in a downtrend, the VIX is likely to spike higher from these already higher levels.

So, as usual, I suggest that we try to have a cake and it too. I’m putting out some offers to sell some of my VIX calls — about 1/6 of my position or so. And I’m holding onto the bulk of my VIX calls for the next several weeks as I continue to think that complacency and confidence in the markets are at rather elevated levels themselves.

Don’t forget to join us for this week’s Live Q&A Chat today at 2pm EST at https://tradingwithcody.com/chat.

Here’s some Q&A about the VIX that I answered from last week.

Q. In lieu of trading options you have recommended using common shares. There is no common VIX so what do I do?

A. Hmm, good question. You could use this VIX ETN for short-term VIX trades. Or just trim some of your longs and raise cash when you see me buy VIX. Mainly right now the VIX calls are hedges to help lock in our portfolio’s gains.

Q. Hi Cody, I know almost nothing about VIX other than I believe it to be a measure of volatility. Please provide a brief primer on the basics of VIX. What are you trading? Where is it traded and in what form? What do the amounts mean? What are you looking for as a goal for this trade both in terms of the level you expect to reach and the timing of the trade?

A. Great questions about the VIX. Let me tackle that in a complete article for tomorrow.

Thanks! works for me.

Q. My brokerage does not show any options for VIX. Should I be looking for an ETF like VIX or change Brokers?

A. Check for VXX options instead of VIX options. I wouldn’t concern myself too much with trying to emulate my VIX trades as they’re not exactly huge anyway and they’re not worth changing brokers over. In fact, hearing all this feedback from you guys, I’ll try to taylor my commentary around alternative ideas to any VIX trades I do in the future.

 

 

 

 

Related posts:

Trade Alert: Reading the writing on the wall at BKS
Trade Alert: A flexible surprise about JD
Trade Alert - Locking in Softee profits and noting how mea culpas are key to success
Trade Alert: Trimming some gold miners, looking at some buys
Trade Alert: Eyes On the Prize, Spacey Space, Helium 5G Network And More
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Filed Under: Trade Alert

Disclosure: At the time of publication, the firm in which Willard is a partner and/or Mr. Willard had positions in some of the stocks mentioned above although positions can change at any time and without notice.

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This does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or cryptocurrency or token any other product or service by Cody Willard or any other third party. Furthermore, nothing in this is intended to provide tax, legal, or investment advice and nothing in this should be construed as a recommendation to buy, sell, or hold any investment or security or cryptocurrency or token or to engage in any investment strategy or transaction. You are solely responsible for determining whether any investment, investment strategy, security or related transaction is appropriate for you based on your personal investment objectives, financial circumstances and risk tolerance. You should consult your business advisor, attorney, or tax and accounting advisor regarding your specific business, legal or tax situation.

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