Wall Street is seemingly beside itself these days as the broader market makes new highs. But if you’re of the mind that investors are due for an unpleasant and volatile wake-up call, one clever partial hedge or portfolio diversifier is a pair of bullish options spreads on down, but not out financials CBOE Global Markets (NASDAQ:CBOE) and Virtu Financial (NASDAQ:VIRT).
Let me explain.
What’s not to like about the current relentless rally in the U.S. market? Well, if you’re an investor in CBOE stock or VIRT stock this year, the answer is “a lot!” Both names have been heavily penalized in 2018.
In large part, the bearish behavior in both stocks is due to low market volatility and investors betting more good times are on their way for the broader indices. Investors don’t expect the good times to roll for CBOE or VIRT because they thrive in less bullish trading environments. But investors shouldn’t believe the bearish hype.
Both CBOE stock and VIRT stock are in value territory on their price charts as the market enters the historically weak and volatile months of September and October. Odds favor a rebound in both names, and with a pair of bullish options strategies, investors can capitalize with improved odds and safety.
Financial Alternative No. 1: CBOE Stock
This year hasn’t been kind to CBOE stock. At their recent low, shares corrected 34% from their January high and are off 19% on the year. One large albatross hanging over the financial and commodity exchange, is its flagship VIX products. The instruments bring home the proverbial bacon for CBOE as bulls are getting fried.
But that’s been a rare bird.
It’s during bearish markets that activity for long volatility hedging strategies used to protect portfolios increases. But outside a handful of mini panics during the market’s historic bull-run of nearly a decade, investors haven’t been rewarded for acting judiciously. And with each passing rally, the sense that this type of insurance is a waste of money, which needs to be avoided, only grows larger.
Aside from this year’s discussed relative weakness, the CBOE stock chart also points to evidence that a bullish contrarian-style entry has technical merit. Shares have successfully tested the 38% retracement level in a double-bottom pattern, which undercut a large bullish hammer low back in February.
No doubt others will see a more bearish-looking set-up. Shares of CBOE have put together a series of lower lows and highs, a moving average death cross and even a bearish flag pattern complete with an overbought stochastics reading. I get it. But the bearish view also looks like the easier position to take– and typically what’s easy to see is also wrong.
CBOE Stock Options Strategy
I like approaching CBOE stock with a slightly out-of-the-money bull call spread. One favored combination is the Oct $105 / $110 call vertical. With shares of CBOE at $100.23, the spread is priced for 85 cents.
A call vertical reduces and defines the trader’s risk. It also doesn’t open up the trader to additional downside exposure beyond the small debit of 0.85% paid to enter the spread. And if CBOE stock does proceed to rally, then this vertical is strategically placed just above the recent high and it smartly caps its gain of $4.15 for a return of nearly 500% … a couple percent beneath 200-day simple moving average resistance.
Financial Alternative No. 2: VIRT Stock
Virtu Financial makes markets in 36 countries and a staggering 12,000 financial instruments using high-frequency trading (HFT) strategies. And the company is very good at what it does. In fact, from 2009 to 2014, Virtu lost money only once. That’s right — a single losing session wedged somewhere in-between nearly 1,300 profitable trading days.
The risk for this type of operation is in low volatility environments, where profits from VIRT stock’s rapid-fire, algorithmic-driven trading activities are squeezed. And with many markets slowly steam rolling bears to new highs, Wall Street is perversely worried things can only get worse for Virtu Financial.
Having said that, with Wall Street boldly donning its rose-colored eye wear for the broader markets, VIRT stock has become attractive collateral damage on the price chart as traders bet aggressively against two-sided or bearish volatility rearing its ugly head sometime soon.
Technically, shares of Virtu Financial have sunk from all-time-highs into a steep corrective test of prior resistance and the 62% retracement level in four short months. As such, when volatility does come roaring back to the surprise of market bulls and possibly for a more extended visit, VIRT stock should be in a very strong position for bulls to profit from a strong rally.
VIRT Stock Options Strategy
After reviewing Virtu’s options, I like approaching VIRT stock with a modified open fence strategy. With shares at $22.15, a bullish trader can purchase the Mar $25 call and sell the Mar $20 / $17.50 put spread for a debit of 55 cents.
If VIRT begins to rally, the call which has been partially financed by the put vertical offers the possibility for large intrinsic gains. For instance, if VIRT managed to return to its April high of $37.55 this trader would be enjoying a profit of $12 or more.
The most obvious risk with this VIRT stock strategy is the sold put spread.
Combined with the debit the trader maintains risk of $3.05 below $17.50 at March expiration. Still, with a break-even of $20.55 near the July technical low, as well as being the worst case scenario for beginning a stock accumulation strategy approximately 7% below today’s market price in VIRT — I don’t mind thinking this option trader could give HFT types a run for their money.
Disclosure: Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
