Standing in line at a coffee shop the other day, I overheard the person in front of me tell a friend, "I put $10,000 to work in the market this week. Even if I lose $1,000 or so, it'll be a good learning opportunity."

If that quote doesn't perfectly capture market sentiment during the "Trump rally," then I don't know what does.

Interestingly, market indicators appear to confirm the fact that fear has been pushed to the sidelines as investors continue to accumulate stocks.

The market's well-known fear gauge, the VIX, has gotten destroyed since the US Presidential election - recently dipping below 12 - which is roughly 40% lower than it was in early November.

With equity prices on highs, and fear on lows, is it shocking to think new investors want to join the party?

The question then, is how one might leverage the current situation - and a recent episode of Options Jive is a great place to start looking for ideas.

On the show, a graphic is presented that shows the VIX has actually been rising ever so slightly during the latter part of the rally. This is worth noting, because more often than not, equity averages and the VIX are inversely correlated.

The slide below shows that around December 7th, the VIX actually started moving in the same direction as the S&P 500 (SPX):

As discussed on Options Jive, there are a couple reasons why the VIX may have reversed course when the rally picked up pace. First, it's possible that a small degree of doubt crept into investors’ minds when the market entered uncharted territory (all-time highs).

Second, there are entities in the market that need to need to continuously hedge, no matter the prevailing market conditions. It's this activity that has likely kept the VIX from closing below 9.9 at any point in the last 10 years.

Because it's not necessarily optimal to sell premium when the market is on high and the VIX is on lows (increasing risk, decreasing reward), the Options Jive team outlines several strategic approaches traders can consider in this unique environment. These trades stand to profit when volatility expands and/or when the VIX increases in value.

With regards to trading in single-stock names, indexes, or exchange-traded funds (ETFS), the following three structures are outlined on the show (all positive vega):

  • Calendar (long vega)

  • Bullish debit spread (long vega)

  • Bearish debit spread (long vega)

Additionally, two trades are presented that are uniquely tailored for the VIX - a long VIX call spread, and a VIX short ATM put.

For traders looking to avoid the hassle of trading deltas, the VIX trades may be particularly attractive. The VIX is of course not subject to the price action associated with single stocks, indexes, and ETFs. In this regard, VIX trades represent "pure volatility" exposure.

A previous episode of Options Jive focusing on so-called "pure volatility" may be worth a few minutes of your time if you are interested in learning more about VIX-specific trade structures.  

No matter what trade(s) you ultimately decide to deploy, it's important to keep in mind that while equity markets have been steadily rising (and the VIX falling), it’s possible that downside risks are now being mispriced.

The fact that new investors are jumping into the market seemingly on a whim is another important data point.

For a better understanding of the topics discussed in this post we hope you’ll take the time to watch the full episode of Options Jive that presents context around the current trading environment.

If you have any questions, please don’t hesitate to contact us directly at support@tastytrade.com.

We look forward to hearing from you!


Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.