There is no doubt that this week will go down as one of the wildest weeks in market history.
Finance students will be reading about how a community of social media-fueled investors moved together to push a group of heavily shorted stocks significantly higher.
Stocks like GameStop (GME) and AMC Entertainment (AMC) have been a few of the beneficiaries, popping 1,745% and 839% in 2021.
Why did this happen?
Well, when the sub-Reddit community known as WallStreetBets decided to focus on some of the most heavily shorted stocks and bought hordes of shares and calls options (which most of the market makers hedge their risk by purchasing even more stock) . . . and the short squeeze was on.
The prices of the targeted stocks pushed significantly higher. Those that were short started to cover their short positions to limit their losses . . . some by choice, others due to margin calls.
Either way, when you cover, you are buying the stock back. The frenzy of buying by those that were originally short stock accelerated. That led to higher and higher prices and one of the most interesting events in market history . . . something we may never witness again.
Or possibly it’s the new norm. Only time will tell.
Now, as a quant who thrives on heightened levels of volatility, how can I take advantage of an implied volatility in the neighborhood of 500%?
Well, I can think of a few strategies to take advantage of heightened volatility, but in this scenario, I’m not sure they would apply.
For one, platforms are limiting trading, and in some cases halting trading in those stocks altogether . . . certainly not a situation I want to put myself into when placing a trade.
Additionally, the bid-ask spreads are incredibly wide . . . so throw efficiency out of the window and therefore any real potential for a legitimate trade.
Buy hey, this is why I choose to play earnings. I might not see an increase in volatility of 250% to 300%, but I often see a short-term volatility increase in the neighborhood 50% to 75%.
I mean, just look at the VIX over the past week.
The volatility index pushed from 23 on Monday to 31.95 on Friday, a jump of 38.9%.
These types of occurrences happen far more frequently than a historic move in GameStop or AMC or some other high-flying stock that has little to no long-term financial future.
Moreover, I can use strategies that take advantage of these types of moves using a wide variety of strategies . . . and the best part, there isn’t near the risk of getting into one of these recent high-flyers.
I actually sent out a trade a few weeks ago on the VIX in The Strike Price for all of you to read (and take advantage of, if you so choose). We can lock in those gains for close to a 40% return.
Here is the closing trade:
Bull Put Trade
We originally sold the spread for $0.65. We can buy it back for roughly $0.10 to $0.15 now and lock in some really nice profits.
Buy to close the VIX February 17th 2021 21 puts
Sell to close the VIX February 17th 2021 19 puts for roughly $0.05 to $0.10 (price may vary slightly)
Now Here’s a NEW Trade
But now that volatility has popped 38.9%, we can take advantage of another trade.
S&P 500 (SPY) – Bear Call Trade (open)
Here is the trade:
The following are the SPY options with 21 days left until expiration.
Sell to open the SPY February 19th 2021 388 calls
Buy to open the SPY February 19th 2021 391 calls for roughly $0.69 (price may vary slightly, adjust accordingly)
The goal of selling the SPY bear call (credit) spread is to have the underlying ETF, in this case SPY, stay below the 388 strike through February expiration in 21 days.
Here are the parameters for this trade:
- The Probability of Success: 81.37% (call side).
- The max return on the trade is the credit of $0.69 or 29.8% based on the required margin ($231) over the next 21 days.
- Break-even level: $388.61.
The maximum loss on the trade is $2.31 (remember – that’s really $2.31 per contract).
I hope all of you are finding my trades useful and more importantly, profitable.
I will be sending out my closing trade for Chevron as well over the coming days. Stay tuned!