The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move wildly.
The S&P 500 rallied just over 27 points on Tuesday, while VIX dropped like a stone to 20.58 – down 1.39 points.
Those moves were a result of the European Central Bank saying it may slow or stop rate hikes soon.
Is the same coming from the Fed?
CPI is the answer.
So, how big a move are we looking for in CPI. The answer comes from S&P 500 straddles.
Take a look at the daily straddle prices in SPX and you will see …
The 3920 straddle for Wednesday is pricing in about 29 points of movement …
The Thursday straddle, the day CPI is released, 83 points …
The Friday straddle: 89 points.
You see the huge jump between Wednesday and Thursday – and lack of Jump between Thursday and Friday.
That is CPI.
They are basically pricing in more than an extra 1.25 percent of movement from the straddle …
So what is the trader to do? An answer to that question actually lies in Wednesday options.
My suspicion is that after the rally on Tuesday and breach of the 50 DMA there will be a bunch of traders that want to take money off the table.
If we open up tomorrow, I think there is a great opportunity to fade the rally in the afternoon.
If we are down, I might follow the trade lower at least until the last hour of the day – at which point all bets are off.
Your Only Option,
Mark Sebastian