My Two Favorite Options Strategies Right Now

These days, much of the market's activity occurs in the first few minutes. Stocks either gap sharply higher or sharply lower... and then spend the rest of the day ping-ponging back and forth in a small trading range.

 

For traders, this sort of activity is like watching a football game in super slow motion. You know there's the potential for something big to happen, so you can't look away. But it's tough to keep your eyes open.

 

By the look of the following chart, that may be about to change...

 

 

 

This is an updated chart of the Volatility Index (VIX) plotted along with its Bollinger Bands – which last I shared with you back on August 13. The VIX measures the premium option traders are willing to pay for index options. The "BBs" measure the trading range of that premium.

 

As you can see from the bottom chart, the Bollinger Bands are as tight as they've been in a year. In other words, the volatility of option premiums is low... and unlikely to shrink further. So stock-market volatility is set to expand.

 

Also, the chart of the VIX itself shows a recent series of "higher lows." This indicates an emerging uptrend. If the VIX can pop above 28, then it will also have a series of higher highs, and the new rising trend will be established.

 

So the VIX is set to break out one way or another. And based on the look of the chart, it appears the path of least resistance is higher.

 

Get ready for an increase in volatility – which should translate into more intraday activity for traders. There are two ways to profit from this...

 

For one, you can speculate on market direction. Since a rising VIX is typically associated with a falling stock market, traders can buy puts and bet on the downside in stocks.

 

Or you can structure a "market neutral" strategy by buying an equivalent number of puts and calls. The idea here is that direction doesn't matter. The increase in volatility will inflate the premium on the options... so the gain in one direction will more than offset the loss in the other.

 

Either way, based on the chart of the Volatility Index, now is a great time to be buying options.

 

Best regards and good trading,

 

Jeff Clark

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