BY MARK SEBASTIAN

July 21, 2023

The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.

Hey Traders,

On Wednesday, the SPX managed a gain of .24%, and the NDX was down .02%.

The VIX, though, was up.

What gives? I thought “inside days”  meant that VIX should go down!

Normally yes, but there are two things to consider.

1. The Market has been on a teer
2. We have a huge NDX rebalance on Friday.

What was interesting about the trading action on Wednesday was that it was the correlation between SPX and VIX all day.

When the S&P 500 rallied, VIX futures went up.

When it dropped, so did VIX futures … especially early in the session when SPX was at its highs:

Once SPX topped out and dropped, VIX futures stayed firm.

So what does this mean?

The algos that have been driving up these stocks have controllers that know the rebalance is coming.

And they started hedging.

Additionally, retail investors – as they are prone to do – are buying calls.

That’s almost always a sign that some sort of selling is coming.

This is why we saw huge Invesco QQQ Trust (Ticker: QQQ) selling on Thursday – the institutions knew they had everyone in they could POSSIBLY pull into the megacaps.

Thus, we see some serious selling as traders position themselves for the rebalance.

Today, I expect to see more of the same, but it might not be as bad as yesterday.

Thursday got a big assist from Tesla Inc (Ticker: TSLA) and Netflix Inc (Ticker: NFLX). We don’t have any earnings coming on Friday.

But Friday night, there will be around $35 billion in the top 7 stocks being sold. I expect traders to continue to try to be out front of that trade.

At the same time, with the NDX coming down, if it does not have another down 2%+ day,  we could see the VIX fall.

The trade: SPY is likely going to drop with the Mag 7 on Friday, and VIX might drop too…

I’d short both as a pair.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian