Hey Traders,
While it was a pretty “meh” Tuesday for the VIX, one VIX index DID heat up.
This particular index was up and the stocks in it had a pretty nice day.
Which one am I talking about?
It’s VXXLE … the VIX index for the Energy Select Sector SPDR Fund ETF (Ticker: XLE).
It was up 2.34% on Monday.
That is a pretty nice move in general … and a strong move off recent lows. Check out the chart below:
This was on a day when the XLE was up 3% …
A 3% move equates to a volatility of 47.61% … yet VXXLE closed the day at 41.5.
What does this discrepancy mean?
If you live in Texas like I do, you know that the refineries are down due to this crazy weather.
Oil and oil products were EXTREMELY strong on Tuesday.
If this was going to be a one-day pop, I think VXXLE would have been stable, or even fallen.
With VXXLE being bid, that means there was big demand for XLE options.
Looking at the option flow, that demand was NOT for puts:
XLE traded about 2X its normal volume — with call volume up 222%!
And there was serious demand for calls in XLE on Tuesday.
When combining the pop in volatility with the pop in call volume I can only come to one conclusion …
That XLE’s breakout on Tuesday to six-month highs is not over.
Prepandemic XLE was trading just over $54 per share …
I think that level is coming FAST — and I’m a buyer of calls.
March 46 calls closed for about 2.15 a contract…
I think those are going to end up SOLIDLY in the money..
I will target starting to sell these above 4.00 a contract and think they could expand to $6-8 per contract when all is said and done.
The Option Pit VIX Light Is RED, And Short Vol Plays Are Going to Work …
Your Only Option
Mark Sebastian