Another options trading strategy from InvestorPlace.
Second, the VIX. This measure of market uncertainty, called the Fear Gauge, is the friend of the trader who wants to make money but is uncertain of market direction. So she trades uncertainty. Sounds like the “Whose on First” routine but this is a real trade. The VIX has been near its historic lows and the summer should prove to be volatile in the real world and in the markets.
You can trade the VIX four ways:
- Play the VIX straight up by buying calls. If you go this route, the VIX is now between 20 and 21 so look for something no later than September and no more than one strike price above the current price.
- Buy the ETF for the VIX, the VXX, known formally as the iPath S&P 500 VIX Short-Term Futures (NYSE: VXX). This is roughly around 25 and is a solid long term play on volatility.
- Buy the calls on the VXX. The premiums on the VIX calls are typically lower due to the liquidity in the index. That’s a good thing when you are buying them but not necessarily when you are selling them. That’s why some traders buy calls on the VXX. Look to buy them close in — August or September — and a bit out of the money, the $26 or $27 strike.
- Buy the ETF and write calls against it. As with gold, there are Weekly and monthly calls and you can use the proceeds to average down your position.
Have a good summer and be careful.
Michael Shulman uses simple trading tactics to make solid, profitable investments in falling stocks in his Short-Side Trader service.