Thanks for stopping by! If you’re here via my April 14, 2021, VIX Edge post, be sure to join me this evening for my can’t-miss webinar “Learn My 3-Step System To Trading NEW Markets.”
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The Option Pit VIX Light Is Red, and volatility will continue to fall.
Hey Traders,
Well, it took a bit …
But after a crazy drop and rally, the VIX is finally starting to give us the all clear.
While we could still see a selloff or two, I think we have some real opportunities forming in the coming days.
Now, up top you can see that the Option Pit Vix Light is Red.
What does that mean?
First, the VIX light is a proprietary indicator made of four components that I’ve developed over 20 years as a trader to help guide my trading strategy — and I hope that you’ll use it, too.
The four components? VIX Curve Formation, VIX Correlation, VIX Volatility and VIX Option Implied Volatility.
When the light is red, it means the market is falling or staying stable. You can create a trading system and run your normal risk approaches.
So, let’s see how we can make money in the current environment …
All VIX Light Components Are Red
The most important VIX Light component — VIX Curve Formation — is in a steep contango (futures price is higher than spot price):
But the good news is that there is still PLENTY of room for the futures to fall.
With only three trading days left, March is trading a point above the cash index.
The other three indicators:
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VIX Correlation: VIX is dropping and the S&P 500 is rallying. That tends to be bullish.
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VIX Volatility: VIX vol is, in fact, slowing. This means while we won’t see BIG drops in the VIX, I think we could see the VIX decline .50 a day between now and SPX expiration next Friday.
Remember, next week is a quarterly expiration, which means its quadruple witching. While we tend to think these are “crazy” events, in reality, lately they have suppressed market volatility.
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Vix Option Implied Volatility: Finally, VIX option premiums are dropping:
The VVIX chart above shows that VIX options premiums are near their trading lows.
I think there is an off chance we could see VIX option volatility fall below 100.
That would be a first for a very long time and such a drop is a sign that the “race to hedge” is subsiding … which is a very bullish signal.
Mark’s Move
So how am I playing this?
I love an April convergence trade that I wrote about yesterday.
But I also like inexpensive options in March.
The 23-20 puts all seem inexpensive from a cost perspective:
The 21s for .15 and the 20s for .05, in particular, are inexpensive from a risk-reward standpoint … Betting .05 to make .50-1.00 is a nice play.
Finally, I know the S&P 500 is at a new high … but I think it’s going to run to 4000 by S&P 500 options expiration.
With the VIX Light Red, I like upside call plays in the S&P 500 — which is also giving me a green light for long S&P 500.
The Option Pit VIX Light Is Red, and volatility will continue to fall.
Your Only Option,
Mark Sebastian
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