Yo Pit Crazies,
Option trading involves cause and effect – SPX goes up and VIX goes down.
Right now, we’ve had 29 out of 32 days where the SPX has closed within 1% of 4130. That’s an astounding number. Market stuck going nowhere yet with a .64% drop in SPX, VIX was up .87.
Way more than necessary for 0 move in a string of 0 moves.
In the Trading Desk, we came up with a trade to capitalize on this “expensive” VIX.
I think the internal stress in the market is showing up in the VIX.
Let’s see where it might leak out.
Traders Make Things More Expensive Early
As an old market maker on the Cboe and P-coast, I learned early to jack prices up for options when I was uncertain.
How did I know the prices were expensive? Because there was no way I could justify buying those options on a relative basis. And right now, stocks are moving relatively less, and the market is charging more for option premium.
The problem is more pronounced in the Invesco QQQ Trust (Ticker: QQQ) where that index is up 23% this year already. Paying up for no earnings growth is high P/E, high beta stocks is the new flight to safety trade. The single direction drives volatility lower but the one way ticket to ride opens up a ton of downside risk.
What we did in the Trading Desk was to “sell the volatility” using iPath S&P 500 Short Term VIX Futures ETF (Ticker: VXX) puts and buy puts in the QQQ.
That way when this debt nonsense is over, we have a shot to make money when VXX drops and QQQ gives up some of its safe haven status.
To Your Trading Success,
AG