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Firing Line: Bullish Options Trade on Volatility

NEW YORK ( Top Gun Options) --

Strategic Mindset: In the Top Gun Options Advanced Model Portfolio, we are market-neutral but see possible surges in volatility.

Target: iPath ETN S&P 500 VIX (VXX) trading at $16.49.

Commit Criteria: The VXX, an exchange-traded note that tracks the VIX volatility index, is very unlikely to drop to less than $14, especially given current chaotic market conditions. VXX implied volatility is overpriced relative to its forecast volatility of 19.03% over the trade period. We are looking for possible price movement but for it to stay at more than $14.00 until the exit of this trade.

Tactic: Opening 50 VXX July 2012 bull put spreads (strikes 13/14 ) for a 23-cent credit.

Tactical employment of bull put spread:

  • Selling to Open 50 VXX Jul 2012 $14.00 Puts
  • Buying to Open 50 VXX Jul 2012 $13.00 Puts
  • Net Credit: $23.00 per bull put spread for a total of $1,150.00
  • Max Gain: $1,150.00
  • Max Risk: -$77.00 per bull put spread for a total risk of -$3,850.00

Mid-Course Guidance: We will be watching for a price movement near the short 14 strike. As the short strike is threatened we will adjust the bull put spread as necessary.

Profitability Target: We will wait for this bull put spread to expire worthless and take the $1,150.00 credit as profit. If the VXX surges in the near term, we may choose to close this trade early in the Advanced Model Portfolio, taking a smaller, but faster, profit.

Exit Tactic: We will wait for this bull put spread to expire worthless, adjusting as necessary.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Matthew "Whiz" Buckley is the Founder and CEO of Top Gun Options, an exclusive provider of options training and practical trading applications for options traders of all skill levels. He is also the founder of Strike Fighter Financial LLC, a business-consulting firm specializing in leadership development, risk management and strategic planning for Fortune 500 companies and related organizations. He�s also a Managing Partner and Chief Financial Strategist at Wealth Creation Investing. Buckley flew the F/A-18 Hornet for the U.S. Navy. He's a graduate of TOPGUN, has close to 400 carrier landings and flew 44 combat sorties over southern Iraq. After leaving active duty, he served as a Managing Director at a Wall Street volatility arbitrage options firm and was a founder and the CEO of a financial media company. He is an internationally recognized speaker and combined his experiences in the military and corporate America in his first book "From Sea Level to C Level."

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