Market Conditions are changing rapidly
Yo Pit Crazies,
The VIX is doing something it has not done in several weeks.
I have said before in these pages that VIX makes a great short bias indicator for the SPDR S&P 500 Index Trust ETF (Ticker: SPY). Right now, that bias is starting to look bullish SPY again, which is downright hard to believe.
If you want to learn more about how that works, join me and Mark on the Trading Desk.
Look at the VIX term structure below. My question to you is, what is the most important thing to look at?
VIX curve on the close Tuesday, March 28.
The VIX curve has not done this thing for a month …
The Front End of the VIX Curve is Near $2 Over VIX Cash
Vol Man is conveniently standing underneath the front end of the VIX curve …
My observed “normal” distance between the VIX and VIX front month future is around $2 in contango with VIX at 12.
Now, you say VIX is near 20, and that is correct,
The VIX curve is a forward volatility curve. This is a measure of the difference in volatilities in SPX between two months, with the resulting volatility the net cost of the back month normalized for time to expiration.
That’s something I teach in Pro and OP Mentoring, but the takeaway is how the market is pricing the near term relative to the far term.
It is also the key to successful calendar trading.
– The lower the front month future and the lower VIX cash, the higher the forward vol of the back and less overall realized vol expected near term
– The higher the front month future and the higher the VIX cash, the lower the forward vol of the back term and more realized vol expected in the near term
What the curve above does is make VIX puts cheap relative to SPY puts. VIX options price off of the VIX future, not the VIX cash … so the higher the future, the cheaper the VIX puts.
This sets up an enticing position where I can buy a lot of VIX puts versus SPY puts and set a position up with tremendous positive leverage. It is also market-neutral from the outset.
The odd takeaway from this is the lower VIX goes, the more opportunities from the VIX curve in contango. That’s because forward vol as a percentage of VIX futures gets higher and the decay potential gets bigger.
Mark had a nice idea in the Trading Desk live session yesterday, buying S&P 500 Mini Options index (Ticker: XSP) strangles and iShares iPath VIX short term futures ETN (Ticker: VXX). They essentially do the same thing … but with an extra long XSP lean because of the VIX curve.
I will report on the results this week but they look good this morning.
The Rundown
Big Money Flow
Occidental Petroleum Corp (Ticker: OXY) Mar31 60 calls closed for a 22% gain
Win the Week
Griff is quietly putting up the best short term trading record of the year right now at OP. SPY Mar28 397/396 put vertical spread closed for a 88% gain
Power Income Trader
Griff is trading the swings AND Gamma BOMB squeeze with SPX credit spreads, short term and well OTM. SPX Mar28 4030/4035 call vertical spread closed for a 88% gain.
To Your Trading Success,
AG