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Using Rally to Go Long Volatility

MIAMI ( Top Gun Options) -- Strategic Mindset: At Top Gun Options we're currently Market Neutral with possibilities of surges in volatility.

Target: Volatility Index (VXX) trading @ $15.42

Commit Criteria: This is a new trade on VXX. We are doubling down on this big shift.

The market surged Friday on news of a eurozone deal and VXX dropped significantly. We still feel like VXX is not very unlikely to drop below 15, especially given the current chaotic market conditions. VXX implied volatility is overpriced relative to its forecast volatility of 15.87% over the trade period.

We are looking for possible price movement but for it to stay above $14.66 until the exit of this trade. Note: we are breakeven or better as long as the VXX stays above $14.66.

Tactic: Opening 50 VXX July 2012 bull put spreads (strikes 14/15) for a $0.44 credit.

Tactical employment of bull put spread:
  • Selling to open 50 VXX July 2012 $15.00 puts
  • Buying to open 50 VXX July 2012 $14.00 puts
  • Net credit: $44.00 per bull put spread for a total of $2200.00
  • Max gain: $2200.00
  • Max risk: -$56.00 per bull put spread for a total risk of -$2800.00
  • Mid-Course Guidance: We will be watching for a price movement below the short 15 strike. We are actually safe on this trade down to $14.66 but if 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 taking the $2,200.00 credit as profit. If the VXX surges up in the near term we may choose to close this trade early, taking a smaller, but faster profit.

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

    We are sellers of this short squeeze.

    German Chancellor Angela Merkel will have to sell this new plan at home and the German people will not like it. Finally, the math simply doesn't work out. The eurozone will implode . . . not a matter of if, but when.

    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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