How to play the markets?

This past week has been incredibly volatile. I played the market drop with a put spread, but could have made much more. Losses by not winning is actually a bit worse of a feeling than actual losses suffered.

Anyhow, the markets seem to be calming down, and I’m looking for trades to open. This site is dedicated to non-directional options trades, but as a trader, you’re constantly looking for opportunities, and when it comes, you need to have an open mind.

Here are a few ideas for taking advantage of the settling market:

Play on decreasing volatility – XIV, VXX

By either going long on the XIV or opening a bear call spread on the VXX, betting on decreasing volatility might be a good way to go.

The only reason I don’t open it right now is because of the term structure of the VIX. The XIV and VXX are both derivatives of the VIX, and until I see a definite calming of the VIX, I’ll sit it out. It won’t be too late at that time due to the pricing of these derivative ETFs, so no worries. Just have to keep my eyes on it.

Short strangle

With implied volatility rather high, you can sell short strangles with wide profit zones.

Covered calls on blue chips

Covered calls, where you buy the stock, and sell a call option above the stock price, might be a good bet as well. Since implied volatility is still high, the premium for writing the call is higher than normal as well.

Stocks like AAPL and FB have fallen quite a bit from their tops, and even if they fall a bit further, the option premium would cover some of the loss from the underlying.

Ultimately, it all depends on where the market is headed

Everyone has an opinion on where the market is headed, and everyone can back their given opinion with data. The more news you watch right now, trying to guess which way the market is headed, the more you will go nowhere. It’s a 2 way street, which is the reason the VIX still has such a sharp backwardation.

However, treasuries are going lower, meaning money is flowing away from there into other, riskier asset classes. The US economy is going strong as well. China is a problem, and it is the worlds biggest economy after all.