00:00 Speaker A
With uncertainty remaining the word on the street volatility has entered a new phase. So how should options traders tackle the shifting rules of the volatility game? Baycrest Managing Director David Bool joins us now for the options playbook sponsored by Tastytrade. David, it’s great to see you. So you say here, David, VIX 30 is the new 20. What what do you what do you mean by that, David? Walk us through it.
00:35 David Bool
Well, investors have gotten very comfortable over the last year, really since COVID, that VIX kind of stays in this range in the mid-teens. And then if there’s some sort of a panic, some sort of reason for risk off, it spikes above 20, sometimes gets to 30, sometimes even higher, but then the sell-off is as severe often times as the spike higher. We saw that in August of 2024. This is different. I would compare this more so to the COVID shock from a volatility perspective where you get the big move up through 30, up into fif in the 40s and then we just kind of have a new baseline. It’s very similar also in that there’s a lot of headline risk in the market where we’re trading off of obviously Trump tweets and uh posts that he puts out. Similar to COVID where it’s just any uh news article can move the market. That’s almost more important than the actual economic data and earnings. We saw Netflix just now is moving just 5% after its earnings report. That’s a little less than what earnings were anticipating for that move today. So but you know, a Trump tweet over the weekend could move markets much more. So when I look back at what VIX did during COVID, it stayed above 30 uh and really didn’t get back below 20 until entire year from the initial spike. I think investors are just going to get used to this VIX around 30 range, which implies about a 2% move every day. Um and that’s kind of what we’ve been seeing in April and I think that’s here to stay. It’s not a re it’s it’s a new regime that we’re in.
03:06 Speaker A
So as we sit in a a higher volatility environment, maybe uh structurally, at least for a little while, where are the where the opportunities that you see in the market to uh to take advantage uh through options?
03:33 David Bool
So I for clients tell me the VIX is a little bit in no man’s land right here. It’s at 30, so it’s you know, if many had a time machine, they would love to go back and buy a lot of option premium when VIX was 15, but now that options are a little bit more expensive. Um I I see clients, some of them are a little bit frozen where they’re saying, wow, hedges are a little bit too expensive to buy up here with VIX above 30. Um and also many are petrified uh to to sell wall to fade it going lower. I I disagree. I think there’s opportunities on both sides. If you get a little bit more clever with how you structure the trades, I think you want to play a range on either side and you can use some of that expensive volatility uh in our favor when we structure positions all while keeping it limited to the premium spent. That’s very important. I’m not suggesting that you um sell a VIX 40 strike call and have the risk of blow up risk out there, but I’m seeing folks uh look to fade volatility back into the lower 20s, mid 20s, lower 20s with uh put flies on VIX. I think those are interesting and I also think there’s range bound trades to still put hedges on here where you can get paid, you know, five, six, seven times your money in a very realistic range.
05:37 Speaker A
David, speaking ahead, Tesla earnings on deck next week. Uh is there a trade there, David, to walk us through?
05:52 David Bool
Tesla is really interesting. Speaking of trading in a range, it hasn’t it’s been in its own Tesla range, which is about $50 uh either maybe $60 either side of 240 where it close about where it closed today. Um the sentiment’s pretty horrible in Tesla, especially where I am out here in California, and I feel like a lot of bad news may be priced into the stock and it’s come down from 500 to 240. You know, I I saw an interesting call spread play a uh, you know, potential move back up to the high end of the range earlier this week. So the trade that I would put on um to benefit if the stock does go higher is the April 25th, next Friday, 265, 285 call spread. Um you’re risking about $2.75. It’s not much premium to be able to uh benefit from about a seven times your money payout if the stock goes back higher. That’s about you get exposure to up 10, up 20% range. Um so while the stock has been lower, five of the last earnings prints, when it goes up, it really goes up. So there’s been an up 20% move, an up 12% move, etc. So if you think that earnings next week are a little bit of a coin flip, I like taking that coin flip and getting paid five, six, seven times on money if that payout hits.
08:24 Speaker A
David, great to see you and to have you on the show today. Thank you.
08:30 David Bool
Thank you.