Find Out: The Trades I’m Making During This Irrationally Exuberant Time

by Options Sensei |

Stocks continued trending higher this week.  Induced ‘derisking’ dropped the indices over 2% in a day as they’ve been in a well defined, low volatility trend higher since the election.  Interestingly enough, the CBOE Volatility Index (VIX) popped over 35% on that Jan. 28 dip — now stubbornly remaining above the 20 level.  This was one of the largest single-day percentage increases, serving to bring the “fear gauge” back to the pre-election peak. 

current vix volatility index

Despite all the talk, and evidence of extreme bullishness (some would say euphoria) there’s underlying nervousness, especially among institutional money managers, who want to maintain portfolio protection. 

Individual investors/traders, especially those using options, have no fear or need for such prudence.  The amount of call buying by retail traders has surged to record levels.  I suppose the “you can only lose” what you spend” is a form of money management as long as you keep position size, and the number of positions, within a proper allocation.

Here’s an image showing the surge in small orders (less than 10 contracts) in both dollar amount and total contracts. 

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small trader buys calls to open

There’s certainly an advantage to being fearless and buying ‘YOLO’ calls on every electric vehicle stock or new printed SPAC — it’s worked amazingly well, and I occasionally look on with envy.  The past few months personify the saying, “make hay when the sun is shining.”  Right now, there’s a billion-kilowatt beam blasting the riskiest assets to the moon and rewarding those who played these lotto tickets to triple-digit gains. 

However, as readers know by now, I tend to take a conservative style when it comes to the stock types I trade and the strategies I use.  A portion of this stems from incurring massive losses during the early years of my career via selling naked options, only to watch them blow up in my face. The rest just comes with the experience of realizing that if I want longevity, and to enjoy the perks that come with trading for a living,  then it would behoove me not to focus on leveraging the probabilities in my favor.  

I wouldn’t even dare to call a top, but I do hope that the YOLO crowd has the wherewithal to take some money off the table and appreciate that this is an extraordinary and likely unstainable period. 

For my Options360 Service, I keep chugging along, churning out profits, and keeping my blood pressure down.

Below, you’ll see the current positions in my Options360 Service.  The service is up 8% so far in 2021.  Maybe not worth the rocket ship emoji favored by the Reddit crowd, but it beats the S&P 500 3.5% gain. And more importantly, I feel in control with it generating my service members consistent profits. 

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  1. WMT long 2 contracts Feb (2/19) 145 Calls short 2 contracts Feb (2/012) 148 Calls at a cost basis of $2.75 cost basis. There had been a couple of times it looked like the stock was ready for a run, only for it to roll over.  A rally this week would be welcomed. 
  2. TLT long 2 contracts March (3/19) 148 Calls and short 2 contracts Feb (2/12) 151.5 call at a $2.80 cost basis. There’s a tug of war between brewing inflation and Central Banks keeping rates near zero. 
  3. INAQ current position is long 1 contracts Feb (2/19) 17.5 Calls and short 1 contracts Feb (2/19) 20 calls for a net credit of $0.50.  Basically, we have a small profit locked in, not wanting stock to run-up through $20 a share.  
  4. MS long 2 contracts March 3/19 72.5 Calls and short 2 contracts Feb (2/19) 76 Calls at a $3.95 cost basis.   MS is showing some strength, but I may take an intra-week roll down.  We’ll see. 
  5. FB long 2 contracts Feb (2/19) 252.5 puts and short 2 contracts Feb (2/19) 257.5 Puts and short 2 contracts Feb (2/19) 267.5 calls and long 2 contracts Feb (2/19) 270 calls for a net credit of $2.10 for the iron condor. All last week, the stock was bumping up and through the $267.50 call strike all.  I may look to exit this for around $1.50 — if it can drop a bit this week. 
  6. SOLO bull ratio spread of long 2 contracts March (3/19) 7.5 Calls and short 1 contracts Feb (2/19) 9 Calls at a $150 costs basis. SOLO got a nice pop last week and we took some money off the table.   There are now weekly options, so we have additional flexibility for adjustments. 

Today we also added a bearish butterfly trade in Riot Blockchain (RIOT), the Bitcoin miner, currently trading up 119% YTD.  It’s a longer-term and low-risk trade.  However, it will pay off handsomely if the cryptocurrency has a sharp sell-off in the coming months.  

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