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All of the major indices have recently broken out of their tight trading ranges, and that’s a bullish sign. The transportation sector broke out as well, confirming the move higher in the Dow Jones, although they have started to retreat somewhat since then. On the other hand, it’s possible that the market could be getting TOO bullish, so I’m slightly cautious at this time.
At a time that so many warning signs are flashing around the world, the CBOE Volatility Index (INDEXCBOE:VIX) got down to just 9.04 on Tuesday. I see this extremely low level as an opportunity to put on a “downside insurance” position. So, today I’m recommending a VIX call debit spread:
Using a spread order, buy to open the VIX Oct. 18th $11 call and sell to open the VIX Oct. 18th $14 call for a net debit of about $1.15.
Note: VIX options expire on the Wednesday 30 days prior to the next month’s Friday options expiration day. So, in this case we’re opting for the VIX options that expire on Wednesday, Oct. 18, 2017.
Note about tickers: Your broker should offer VIX options, but it’s important to remember that not all brokers will use the ticker VIX to denote these options. This is because the VIX is a true index, and most brokers use special characters to indicate an index ticker — the most common examples are $VIX or ^VIX.
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.