Play VIX Calls

Making Volatility Our Ally

By Bryan Bottarelli
Monday, June 30, 2008 9:59 AM EDT
Mon, 30 Jun 2008 13:59:00 GMT

PLAY: Buy the VIX July 25 Calls (VIX GE) at or under $1.80, good for the day. Place a protective stop limit at $0.80, but do not place a sniper sell at this time. I’d like to play any big VIX pops for all that we can get on this one.

Dear Bottarelli Research Member,

Let the “bear market” references begin…

The major market averages are down around 14% year to date, but since the Dow has now dropped off 20% from its October highs, this has officially triggered the definition of a “bear market.”

The second that we briefly touched this technical metric, it looks to me like every financial analyst and reporter are all convinced we’re in a bear market. Reading through this week’s issue of Barron’s, for example, I counted over 10 references to a “bear market.” Perhaps they’re all right. But in my experience, the moment that everyone comes to the same market conclusion, that’s when you typically witness the key pivot reversal points.

On that note, let’s now discuss one important aspect of our current market conditions. In previous occasions this year, where we witnessed the markets fall to these low levels, the Fed responded by slashing rates — and the government responded by writing checks. Both instances were welcomed by Wall Street, but it’s quite clear that these were each temporary fixes.

Right now, however, things are different. The markets are falling to these same key levels without any outside influence. Aand to be honest, I think this is much healthier for the markets. After all, we could witness stocks truly falling to bargain levels — and this could induce buyers step in. If we find a true buy-side catalyst (as described in this scenario), the markets could finally establish a legitimate support level. In my view, this scenario (while painful in the short term) is much better than being bailed out by easy money time and time again.

Now, in terms of our current market levels, I find it rather interesting that the CBOE Volatility Index (VIX) is trading for only 24. After all, as you can clearly see from the chart below, the last time the major market averages hit these low levels, the VIX spiked up to 32. This lack of enthusiasm in the VIX indicates to me that we could be in for one more downside push. And as you know, if the markets do indeed fall further, the VIX will quickly pop higher. Therefore, let’s profit off this volatility by adding VIX calls now.

VIX

PLAY: Buy the VIX July 25 Calls (VIX GE) at or under $1.80, good for the day. Place a protective stop limit at $0.80, but do not place a sniper sell at this time. I’d like to play any big VIX pops for all that we can get on this one.

I’m also growing more and more convinced that we could see oil prices take a quick down-move. Perhaps it’s a crazy notion. But in many respects, a quick oil price reversal could be the catalyst that blasts this market out of its downside range. And if oil prices do move lower, we could have a wonderful opportunity to play calls on the UltraShort Oil & Gas ProShares (DUG – AMEX).

DUG

You see, the DUG moves at a rate which is twice the inverse of the daily performance of the Dow Jones U.S. Oil & Gas Index. So, if oil prices drop 5%, the DUG increases 10%. As oil inches up to the $150 level, I’ll consider adding some DUG calls. But until then, let’s sit tight and keep this one on the radar.

Also, coal stocks continue to blast higher. Names like Fording Canadian Coal Trust (FDG – NYSE) and Foundation Coal Holdings (FCL – NYSE) remain strong upside plays on any dips. So if the timing is right, we’ll have an upside play on the way on one of these as well. But until then…

Lock and load!

Sincerely,

Bryan Bottarelli

Bryan Bottarelli
Editor, Bottarelli Research

© 2012 CSR Group, LLC. All rights reserved. Published in USA.

Information, opinion, research, and commentary contained herein is obtained from sources believed to be reliable; their reliability, however, cannot be guaranteed. The maxim of Caveat Emptor applies — let the buyer beware. Bottarelli Research does not provide individual investment advice, act as an investment advisor, or individually advocate the purchase or sale of any security or investment.

Investments recommended in this service should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Bottarelli Research reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscriber’s initials will be used unless express written permission has been granted to the contrary.

CSR Group, LLC expressly forbids its writers from having a financial interest in any security recommended to readers. Furthermore, all employees and agents of CSR Group, LLC and its affiliate companies must wait 24 hours before following a published recommendation.

Bottarelli Research alerts contain time-sensitive information, and are published and distributed to members with urgency. Because of this, not all published materials can be adequately proofread, and an occasional spelling or grammar error may exist.


Other Options Alerts From June 2008