How to tell if volatility is increasing

Andrew Giovinazzi

BY ANDREW GIOVINAZZI

October 3, 2024

Yo Pit Crazies,

You wonder how institutions leave clues in the markets?

I cannot wait to get back in the saddle today and look for long term trades!

A working vacation with the Option Pit crew and hosting with the mosting Mark is a fun time. There will be more great stuff coming from Option Pit this year.

On the trading front I could not review the action until later Wednesday, but the action has some tell-tale signs that the market is not liking what it sees in the Middle East. A simple product to follow the action is the Barclays Ipath Series B VIX Short Term future ETN(Ticker: VXX)

5 Day VXX chart with sigma volatility on the bottom chart

Note above that the bid for VXX has been steady in fits and starts. That is not normal.

I will explain and see if the institutions are leaving any fingerprints.

VXX is a product that usually decays over time

In order for VXX to keep climbing, traders have to maintain a steady bid, that means buying. That steady bid is kind of like holding a handful of sand, it slips through the fingers the longer I hold it. Traders are busy buying a decaying product every day right now. They only do that if they think something is going to happen.

The kicker for VXX, or the point that makes the case, is most of the long term open interest, the Option Footprint, is in the puts not the calls. Granted the volume is light but there are reasons for that. Mostly Barclays mismanaged the asset, got fined, and that scared away the institutional players. A big put fingerprint is for stocks that go down, not up. Usually the long term outlook for VXX is down, usually 60% or more per year.

For VXX, A break below $50 would mean traders are getting past the Middle East and refocusing on the craziness that is the election. For now I would be surprised if traders sold the VXX before the weekend. Sadly, things do not look like they are getting better yet.

My advice here is look longer term for getting long. Do that here.