Reverse Jade Lizard in SLV | Option Trades Today

Key Concepts

• Volatility: A measure of the expected price fluctuations of an asset.
• Forward/VX: A futures contract on the CBOE Volatility Index (VIX), which measures expected stock market volatility.
• Silver (SI): A precious metal, traded as a commodity.
• SLV: An ETF that tracks the price of silver.
• Implied Volatility (IV): The market's forecast of future volatility, derived from option prices.
• Contrarian: An investor who takes positions opposite to prevailing market trends.
• Reverse Jade Lizard: An options trading strategy that involves selling a naked call and a put spread.
• Put Spread: An options strategy where a trader buys and sells put options with different strike prices but the same expiration date.
• Naked Call: Selling a call option without owning the underlying asset.
• Out-of-the-Money (OTM) Option: An option whose strike price is not favorable to the holder.
• In-the-Money (ITM) Option: An option whose strike price is favorable to the holder.
• Call Skew: The tendency for out-of-the-money call options to be priced higher than out-of-the-money put options.
• Credit: The premium received when selling options.
• Max Profit: The maximum potential profit from an options trade.
• Delta: A measure of an option's sensitivity to changes in the price of the underlying asset.
• Theta Decay: The decrease in an option's value over time as it approaches expiration.
• Probability of Profit (POP): The statistical likelihood that a trade will be profitable.
• Buying Power: The amount of capital required to open and maintain a trade.
• Portfolio Margin Account: A type of brokerage account that uses a more sophisticated risk-based margin calculation.
• IRA Account: Individual Retirement Account, a tax-advantaged investment account.
• Futures: Contracts to buy or sell an asset at a predetermined price on a specific future date.

Market Overview and Silver's Performance

The video begins by noting that volatility in the equity market is at recent lows, with the forward/VX trading at 17.35, down 1% for the day. This suggests a state of "complacency abound" in the equity market. In contrast, there is significant activity in the metals market, specifically silver. Silver (SI) is up over 4%, trading at $60.77, an increase of $2.37. The speaker highlights that while silver futures are a large product (tens of thousands of dollars per point), the SLV ETF offers a way to trade silver with smaller contract sizes, equivalent to $100 per point. Implied volatility for silver is noted as being at a good level of 72%, having slightly decreased from its recent highs but still up 7.9% over the last five days. The speaker observes that silver trades similarly to equities, with price movements of 50 cents equating to $5.

Contrarian Trading Strategy in Silver

The speaker, identifying as a contrarian, plans to take a short position in silver, which is currently trading at all-time highs. The strategy employed is a "reverse Jade Lizard," which involves selling a naked call and a put spread.

Specific Trade Execution: The Reverse Jade Lizard

The trade details are as follows:

• Strategy: Sell a naked call and a put spread.
• Put Spread: A "very pretty close at the money put spread" is being sold.
  • Strikes: Sell the 54.52 put and buy the 52.52 put (a $2 wide put spread).
  • Premium: This spread is trading for approximately $1.00.
  • Observation: The speaker finds this spread "rich" because the premium received is nearly half the width of the strikes, suggesting that to achieve this premium, one would typically need to sell an in-the-money put and buy an out-of-the-money put.
• Naked Call: An out-of-the-money call is being sold, taking advantage of "call skew."
  • Strike: Sell the 58 call.
  • Premium: This call is trading for approximately $2.10.
  • Comparison: The speaker notes that the 58 call, which is about $3.50 out of the money, is trading for $2.10, while a put at an equal distance ($3.50 out of the money, implying the 51 strike) is trading for around $1.50. This indicates that calls are trading "rich" relative to puts at similar distances from the money.
• Total Credit: The total credit received for this combined trade is $3.18. The speaker notes that the market is trading between 3.07 and 3.16, with a natural bid of 2.99, indicating the trade was executed at a favorable price.
• Trade Parameters:
  • Expiration: Approximately 45 days out, specifically 38 days out in January.
  • Probability of Profit (POP): 78%.
  • Max Profit: $3.18 (the total credit received).
  • Delta: Short 27 deltas, indicating a bearish bias. The speaker mentions that a shorter delta (e.g., short 19 deltas) could be achieved by going further out of the money for less directional risk, but they are intentionally taking more directional risk.
  • Theta Decay: $4.00 per day.
  • Chance of Making 50% of Max Profit: 56%.
  • Buying Power: The trade uses a relatively small amount of buying power in a portfolio margin account.

Real-time Trade Execution and Monitoring

The speaker confirms that this trade was executed at 10:12 AM that morning. They provide details for viewers to follow the trade on the "follow page" under "bats." The trade was executed at an average price of 3.18, with the initial sale at 3.20 and a subsequent fill at 3.16. At the time of recording, the stock is trading at 54.72, having moved only 10-15 cents. The put spread has tightened slightly, and the trade now has approximately 27-28 short deltas. The speaker explains that if the price moves $1, the trade should profit or lose around $28-$30, depending on volatility.

Trading in IRA Accounts

The speaker then discusses the possibility of executing similar strategies in an IRA account, specifically mentioning Tastytrade. They note that selling naked calls is permissible in an IRA account, although it may require more buying power. For those who prefer defined risk, the option exists to buy a far out-of-the-money call. The platform allows trading of any option strategy, as well as futures and futures options, within an IRA.

Conclusion and Call to Action

The video concludes with a call to action for viewers to learn more about Tastytrade by clicking a link, reading the fine print, or calling them. This is presented as a way to support the content provided for free.

Synthesis/Conclusion

The main takeaway is the execution of a contrarian short strategy in silver, which is currently at all-time highs and experiencing low equity market volatility. The speaker utilizes a "reverse Jade Lizard" options strategy, selling an out-of-the-money call and a close-to-the-money put spread, to generate a credit and profit from a potential decline or sideways movement in silver prices. The trade is detailed with specific strike prices, premiums, expiration dates, and risk parameters, emphasizing the "rich" pricing observed in both the put spread and the out-of-the-money call. The discussion also touches upon the flexibility of trading such strategies within IRA accounts on platforms like Tastytrade.