Hey Traders,

I often reference volatility indexes other than VIX in this space.

Last week, for instance, we talked about CBOE Energy Sector ETF Volatility Index (VXXLE).

I mentioned it was climbing and that I thought calls were going to pay …

They did.

The XLE March 46 calls I posted about are up 55%.

Indexing

Anyway, arguably the second-most famous index next to the VIX is the VXN. (Not to be confused with 1980s female rock band Vixen.)

No, VXN is the CBOE Nasdaq Volatility Index, the VIX for the NDX (the Nasdaq 100).

This index makes the QQQ, an exchange traded fund (ETF) that includes 100 of the largest companies, both international and domestic, on the Nasdaq exchange. 

I regularly track the spread between the VIX index and the VXN index …

Typically, VXN trades at a 2-3 point premium to the VIX.

When the spread expands to 5 or 6, that tells me there is a bid for volatility in tech names …

When it tightens up, it indicates a bid for volatility on non-tech stocks (like banks and energy).

Take a look at how the spread has expanded in the last few weeks …

What does that show us?

The spread is touching 6.5 and appears to be growing.

At the same time, at midday on Monday, QQQ and SPY (the SPDR S&P 500 ETF) are down — but an ETF like RSP (equal-weighted S&P 500) is up.

Until I see the spread between VIX and VXN start to tighten, the QQQ pain is going to continue.

It appears that we are in the middle of a rotation out of the stay-at-home trade … and the new YOLO trade will be going on a YOLO vacation!

It looks like another week of the DJIA outperforming the S&P 500 index, as well, because the Dow is BY FAR the least tech-heavy of the major broad cap indexes.

The Option Pit VIX Light Is Red, and Short Volatility Plays Are Likely to Work.

Your Only Option,

Mark Sebastian