Aug SPX Volatility is still frothy

BY ANDREW GIOVINAZZI

August 12, 2024

Hey OP Crew,

Want to see the best trading opportunity for the balance of 2024, check this out here.

If some of my Option Volatility Jargon is vexing, our Glossary is here.

AG’s alter-ego Vol Man here with my weekly analysis. As usual, I will start with my last forecast…

Last Week:

“Basically the QQQ is down 10% and SPX is down 5%. Just small pullbacks when I really think about it. For now this is more a haircut in the pretty stocks while others that underperformed have some room to grow. The recession word is the big issue and how bad things get. That right there is a recipe for more volatility. I would guess just a 20 VIX for a low this week with real potential for SPX to give back another 5% or so with QQQ taking a bigger haircut. That selloff will likely be at the beginning of the week while the bad vibes are still out there. VIX should see 30 again before 20. If VIX breaks 20, stock will stabilize.”

VIX hit 50+ before 30 this week with SPX giving back near 5% on Monday before spending a volatile week, albeit decreasing ranges, to Friday where VIX closed, wait for it, 20.37. Not quite Crystal Ball worthy in the The Options Insider Radio Networks Vol Views, but enough for an A from me.

In short we had the 3rd largest VIX spike in history followed by the 3rd or 2nd drawdown in VIX in history. SPX lost $220 on the open for near 4% but really that was the bottom. My biggest issue is that the VIX futures “peaked” but were untradable around $37 and markets for options were $2 to $4 wide. I was not able to close VIX call spreads until around 12 noon on Monday but was happy I did since the prices never got back there again. The SPDR S&P 500 Trust ETF (Ticker: SPY) was liquid enough which is why I like it in Weekly Profit Cycles as a core part of the strategy. It is there and it works when things get nuts.

We called the event the Carry Bomb since it had to do with a liquidity crunch around Yen/Dollar trade and Mark has done a few videos on this in our Youtube Channel. Recession maybe? Rate cut? Maybe? Kamala for Prez? Maybe? The brew of topics is still floating but VIX managed to end the week lower than where it started. Who would have guessed? On me!!! I was able to ride a short VIX down in a few products. The big question is where from here so let’s get to it.

SPX daily price action over the last 30 days

SPX closed at the highs of the week but July is still gone. SPX did drop 4% on Monday but spent all week clawing back. Hard to kill this bull market still. Note the decreasing candles this last week on the right side of the chart. 4 out of 5 up days with decreasing ranges. Not a positive for VIX but it is for SPX.

There were a lot of decent earnings in all of the tumult, notably RobinHood Markets Inc (Ticker: HOOD) and Palantir Technologies Inc (Ticker: PLTR). I own both in my IRA and personal accounts. The short answer is stocks have room to rally and Nvidia Inc (Ticker: NVDA) traded $90 and is now $104. That is enough to keep the FOMO juices flowing.

SPX sigma (Vol per term average) levels over the last 30 days.

Sigma Vols closed below last Friday. What the heck but there it is. Traders can see the ranges decreasing and acted quickly by Friday’s close. Something terrible might happen in the Middle East, God forbid, but 20+ VIX is high enough for it.

SPX realized volatility snap on Aug 09 2024

Realized vol for 10 days is 25.88%. A new high 2024 by a mile. The 30 day realized vol is 18.45 so VIX is still above that number. Stocks are moving at a rate not scene in a year but that rate was decreasing by the end of the week. I would need to see another week of 25% realized vol to know if we are in a new recession regime or not. Right now, we are moving out of it.

VIX Volatility Curves

We were solidly backward last week and now flat. I define a flat curve as 1 point from back to front but VIX cash is just above the futures. A flat VIX curve is a more volatile VIX as we should see a range in VIX by expiration close to the straddle value. That value is $4.00 so 16 or 24 is the range.

Closing VIX cash and curve, Aug 09 2024

The one thing coming out of all this is that the Fed cannot save stocks anymore. No more QE, and bad news is bad again. If the Fed lowers interest rates now, it is because the economy is slowing a bit. The VIX curve is backward, just barely so SPX moves of 1.25% up or down are likely.

Basic Vol 101 on our Option Pit YouTube channel

OP VIX Zone Watch

VIX ZONE 1 9-13

VIX ZONE 2 13.01 TO 17.99

VIX ZONE 3 18-23.99 We are here

VIX ZONE 4 24< We were here

VIX started in Zone 4, touched Zone 3 once and spent all Friday sliding down to the middle of Zone 3. Generally a downward move in a Zone will touch the bottom relatively soon.

VIX 30 day chart with 1 min candles,

SIGMAs for Aug, Sep and Oct

VIX IV just dropped to last Friday’s levels. Real simple there is plenty of movement to come but unless SPX really dumps, IV is dropping quickly. A note the Sigma levels are about the same as last Friday even with the insane spike on Friday. If VIX IV is not going up, it is coming down once a spike hits.

At a 20 VIX expect 5400 again as crazy as it seems. We cannot hold a selloff and for now we cannot kill this bull. I expect the bottom of the range, 18 VIX at least. Traders will not want to hold expensive premium if SPX is just going to manage 2% ranges for the week.

Want to see the best trading opportunity for the balance of 2024, check this out here. Hint: it rhymes with volatility.

Weekly Profit Cycles is opening for a quarterly subscription if you want to learn to trade VIX/SPY exclusively. I am 20 wins for last 26 opens in WPC. So getting paid to own SPY puts in an up market is something anyone can learn to do.

Let’s Got

To Your Trading Success,

-AG