VIX Traffic Light: Almost Green

We’re red across the board this morning – except for the VIX light, that is. That’s yellow.

As I type, the VIX is nearing 26. It has completely blown through the futures, which are flat – putting us in backwardation.

This is the most backward market we’ve seen since April, in fact. And with the VIX light yellow, we’re about to see some wild moves.

From here, we could see the VIX rip up to 35, to 40. Or, on the flip side, we could free-fall lower, back to 17 or 18.

Either way, I think we’re looking at some further selling for the next few days. And the VIX light is almost green – an indicator that almost always results in negative returns for the S&P.

So, the money question – how do you trade it?

Mark’s Watchlist

  1. Proshares Ultra VIX Short-Term Futures ETF (BATS:UVXY)

I’ve got one word to tell you what you’re going to want to do with your portfolio today: hedge.

And there are a few ways you can do that.

You can go long VXX or UVXY, two ETFs that track the VIX. They’ve both got some pretty cheap calls expiring on Friday – and cheap calls are exactly how you make asymmetric returns. In particular, I’m looking at the $30 calls in VXX expiring Friday or the $30-$40 call spread if you’re interested in cutting your risk even further.

Another way to hedge a long portfolio is by buying puts in the SPX. These should profit as the index continues to sell off.

  1. Apple Inc. (Nasdaq:AAPL)

Almost everything is down this morning. But AAPL is down more than most. It had fallen more than 2% before noon.

Now, despite this, options on AAPL remain inexpensive. And that makes this blue-chip ripe for a cheap options pick.

If volatility stays muted, I’d look at buying the October 1 $140 puts for next week.

  1. Robinhood Markets Inc. (Nasdaq:HOOD)

We all know that meme stocks move up faster than anything else in the market. But it works the other way around too. Meme stocks are going to fall faster.

That’s why I’m looking at a nice play on HOOD dropping this week – and we can do that with the January $32 puts.

  1. Oracle Corp. (NYSE:ORCL)

AAPL is down more than most – but ORCL is down less than most.

When the whole market is tanking and you find a name like ORCL, a name that’s down significantly less, that’s a good sign of strength.

Now, I’m not telling you to go buy calls in the sell-off. But when the market does turn around, ORCL will outperform.

Trading Arsenal: Beta Exposure

Remember when I said everything was down?

Yeah, there’s a reason for that – and it’s called beta exposure.

See, there isn’t just one piece of news driving one specific stock down this morning. It’s not a mix of red and green either.

The entire market is dipping.

Now, I don’t want to get too deep into greeks. But beta is a measure of a stock’s volatility compared to the market as a whole.

If a stock is moving more than the market, its beta is over 1. If it’s moving less than the market, its beta is under 1.

You want to beta-weight your portfolio to the S&P. And you can do that by mixing calls in good companies and puts in bad ones.

By doing that, you can start to remove beta. That’s what financial firms do, and really, that’s what you do every time you trade options.

Until next time,

Mark Sebastian


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