With the VIX dropping sharply and the market, especially the tech stocks, continuing their rapid move upwards, it is easy to find ourselves tested again.
Last week the market, due to three key drivers (oil, inflation, war), looked like it will nosedive and many option traders were heavily tested to the downside, but now, with a sharp jump in many of the stocks, it is easy to get trapped on the call side.
How do we defend ourselves in such conditions?
Managing our bp (buying power) position is critical. We do that by not over committing and making adjustments (sometimes multiple adjustments in a day) to lower our risks.
Despite the strong finish for this week, I do not have high confidence in this rally and as Jesse Livermore wrote it in his book of Reminiscences of a Stock Operator, often we make more money just by sitting tight.
This stock only came to my attention at the very end of the trading day. As we can see it in the 15 minute chart, the stock dropped from $52 to $51 within minutes. Frankly speaking, I don't know what caused the fall (let me know if you know) but I thought it's worth risking a few dollars to anticipate a rebound by buying $52.5 call options.
Verizon 15 Minute Chart
Trade Type: Long Call
Expiry: 14 Apr
IV Rank: 47.9
Cap Req: $35
Annualised Prof at Expiry: ?
This trade is an extraordinary trade as option traders normally short (sell) options rather than buy options, but let's see how this one would play out. Worse case scenario: we lose $35 per option.