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The VIX knows... A lot of folks were focused on this week's all-time highs, but I was watching the VIX closest of all.
The Chicago Board Options Exchange Volatility Index had been trading - stubbornly, I might say - in the 16 to 18 range for most of the past week.
Experienced traders read activity like that as a strong signal that volatility is about to spike; it's like an engraved invitation to get some of that "dry powder" capital ready for all the high-profit opportunities volatility brings with it.
Sure enough, the VIX blew past 19.7 this past Thursday morning in the roughest open stocks have seen in a long while.
That's like the green light. That's the starter pistol going off - there's serious money to be made for investors who act quickly on these two stocks...
Small-Caps Are the Ticket to Big Profits Right Now
The VIX was the main indicator telegraphing volatility, but America's smaller companies, with market caps between $300 million and $2 billion, were also letting keen observers know there was chop ahead.
Both the iShares Russell 2000 ETF (NYSEArca: IWM) and the iShares Microcap ETF (NYSEArca: IWC) rolled over on Tuesday as trading opened after the long Independence Day weekend.
Why are small caps under pressure? Well, small caps have always been a great barometer of the American economy; the vast majority of American companies are, well, small. These shares are always sensitive to the ups and downs of life on Main Street.
And right now, the outlook on Main Street is a little hazy. There are concerns about the so-called Delta variant of SARS-CoV-2, and higher-than-expected unemployment numbers have lots of traders wondering whether the recovery's stalling, or worse, topping out.
Whether these fears are warranted or not is a question for another day. Our concern here is making fast money, and small- and micro-cap stocks are where that's going to happen. There are two ways to "play" this sector for fat gains.
Here's How to Profit
The first is to take a position in the ProShares UltraPro Short Russell2000 ETF (NYSEArca: SRTY). This a very simple leveraged inverse ETF that returns three times the drop in the IWM; whenever IWM goes down 1%, SRTY goes up 3%.
The IWM is down close to 4% for the past five days, and like you'd expect, SRTY is up close to 12%. There's much more upside ahead here, just be mindful of your position sizing; this isn't an ETF to bet the farm on. Deploy a reasonable chunk of your speculative capital to this one and look to collect double-digit profits before buying resumes. This one's almost a no-brainer.
Those gains will be nice, but I think even bigger profits are in store for folks playing the IWM directly. It's tough to overstate the rough outlook for IWM right now - the seasonal "summer slowdown," and worries about the pace of economic recovery are all very much in play and weighing on the small-cap ETF.
This calls for a put trade - one with plenty of time and flexibility to book 50% or better gains.
Buy the IWM Oct. 15, 2021 $200 puts for $11.75 and hang onto it until you can unload it for at least a 50% profit. The puts expire in mid-October, but I really don't think you'll be waiting around long on this one.
Besides two sets of double-digit profits, the big takeaway here is that conditions are great for making money, regardless of what the market itself is doing.
In fact, my buddy Shah Gilani recently described this market as a kind of "perfect storm" for moneymaking - we're seeing unprecedented levels of entrepreneurial innovation happening while $569 billion in new capital has hit the markets since November, 2020. Throw in 13 million or so new traders and, well, there's your perfect storm.
Right now, you can get dibs on "pre-IPO rights" in over 500 new companies looking to go public right now - and you can take a stake in tons of these opportunities for $1... a buck. You could potentially watch those stakes rise to highs you never thought possible as these firms go public. In extraordinary cases, peak gains of 2,088%, 6,566%, even 27,550% have been realized. I'll let Shah himself walk you through it right here.
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About the Author
Chris Johnson is a highly regarded equity and options analyst who has spent much of his nearly 30-year market career designing and interpreting complex models to help investment firms transform millions of data points into impressive gains for clients.
At heart Chris is a quant - like the "rocket scientists" of investing - with a specialty in applying advanced mathematics like stochastic calculus, linear algebra, differential equations, and statistics to Wall Street's data-rich environment.
He began building his proprietary models in 1998, analyzing about 2,000 records per day. Today, that database, which Chris designed and coded from scratch, analyzes a staggering 700,000 records per day. It's the secret behind his track record.
Chris holds degrees in finance, statistics, and accounting. He worked as a licensed broker for 11 years before taking on the role of Director of Quantitative Analysis at a big-name equity and options research firm for eight years. He recently served as Director of Research of a Cleveland-based investment firm responsible for hundreds of millions in AUM. He is also the Founder/CIO of ETF Advisory Research Partners since 2007, noted for its groundbreaking work in Behavioral Valuation systems. Their research is widely read by leaders in the RIA business.
Chris is ranked in the top 99.3% of financial bloggers and top 98.6% of overall experts by TipRanks, the track record registry of financial analysts dating back to January 2009.
He is a frequent commentator on financial markets for CNBC, Fox, Bloomberg TV, and CBS Radio and has been featured in Barron's, USA Today, Newsweek, and The Wall Street Journal, and numerous books.
Today, Chris is the editor of Night Trader and Penny Hawk. He also contributes to Money Morning as the Quant Analysis Specialist.
I’m new to options trading. I looked at the IWM $200 put and its currently in the $3.00 range. I’m confused about the $11.75 mention