The Option Pit VIX Traffic Light Is Green: Volatility Is Likely To Go Up.
Hey Traders,
So Monday was nice. The Dow Jones Industrial Average (Ticker: DJI) ran up 650 points, the S&P 500 (Ticker: SPX) gained over 50, the Russell 2000 (Ticker: RUT) blew higher by 47 points for a cool 2.2% gain.
The Nasdaq 100 (Ticker: NDX)?
A paltry 0.85% gain.
The VIX took it on the chin on Monday…
Not a haymaker, but a good punch to the chin.
Take a look at the movement in the VIX futures curve.
In one day it went from a strong backwardation form back into contango:
This is because ARK Innovation ETF (Ticker: ARKK) and its holdings have been at the root cause of this volatility event.
ARKK, which holds many of the most highly volatile names in the NDX, up until today had been in a free fall:
Names like Tesla (Ticker: TSLA), Zoom (Ticker: ZM), Teladoc (Ticker: TDOC), Palantir Technologies (Ticker: PLTR), DraftKings (Ticker: DKNG) all show the same pattern of pain.
Because of ARKK.
It was in a bit of a feedback loop …
ARKK holdings drop, investors redeem, ARKK must sell its holdings to pay investors, and its holdings drop more.
It’s a nasty cycle and has been the driver of a lot of the market volatility we’ve been seeing.
If you pay attention to ARKK, you know where the market is going.
So what now for VIX?
It appears the true blood letting MIGHT be over.
If it is, VIX is going to drop like a stone below 20.
However, an end to ARKK pain is not an assured thing.
There is the off chance that the fund implodes …
So what do I do as a trader?
Buy puts in ARKK, buy puts in VIX as a pair.
That is going to PAY.
Your Only Option,
Mark Sebastian