Yo Pit Crazies,
If you missed Tradefest 2, we had a lot of trades with some option learning’ thrown in to boot. Check it out here.
The Cboe Volatility Index (Ticker: VIX) closed below 24 for the first time since June 8th. There were no bells and no whistles, and no dancing girls … Nothing to celebrate the close in Zone 3 for the first time in five weeks.
A change in VIX Zone from 4 to 3 (or above 24 to below 24) means VIX is now out of the top quartile of volatility. We might see lower vols.
VIX two-month chart with one-day candles
There is just one more thing: The Federal Open Market Committee (FOMC) will opine on rates next week. The European Central Bank (ECB) is expected to raise interest rates today by 50 basis points.
Interest rates are rising and VIX is falling … So can VIX fall more?
Zone 4 is the top quartile and it usually means things are nuts
During one of my student sessions yesterday, my student commented on closing positions.
My answer? In a high VIX market, take what you can get.
In a lower VIX market, trends are usually longer.
In a higher VIX market, trends are usually short lived.
By definition that is how it should be. Expectations for wild swings are not built into low VIX markets. Below is our Edge Hunter VIX Dashboard that helps with pricing the volatility products and forecasting VIX futures moves.
Right now, the VIX futures have the most premium in them since the beginning of the year – a significant change in the short-term implied volatility (IV) picture. The only thing holding up nine-day VIX is the FOMC meeting next week.
Once the curve moves into this position, I like to go max short VIX and max short SPDR S&P 500 ETF (Ticker: SPY)/S&P 500 (Ticker: SPX). Because short volatility expectations are declining, the long-term generally follows if no news shows up. From this level, a short-term drop in VIX could mean big bucks in the VIX puts.
I added vol puts to both the SPYMaster and Vol Trade Club today with a short SPY leg. Let’s see how it goes post-FOMC this week.
The Rundown
Option Shopper
Licia closed out yet another winner, exiting a Merck & Co. (Ticker: MRK) put spread for a +33% win.
Nitro Trader
Mark Sebastian wrapped up a Chevron Corp. (Ticker: CVX) and United States Oil Fund (Ticker: USO) combo trade for a tidy +7%. Not bad!
Power Gains
Bill Griffo and I nabbed a nice +23% with a SPDR S&P Biotech ETF (Ticker: XBI)/Invesco QQQ Trust (Ticker: QQQ) play.
-AG