Not-So-Cheap Cheap Puts

The Option Pit VIX Light Is Red, And Volatility Will Drop.


Hey Traders,


The S&P 500 (Ticker: SPX) is just off an all-time high.


The VIX, though, has failed to close below 17 for three days in a row yet again …


But that’s not what I’m watching …


I am seeing a different index making new all-time highs …


And what this means has huge ramifications on the market.


With the S&P 500 at new all-time highs, and the VIX near post-pandemic lows… 

Some traders might wonder if it is time to hedge.


The answer on the Street seems to be “yes” …


But … not in the way that they have been hedging over the last year.


I’m seeing something strange happening to cheap puts …


They are getting really bid up.


The chart I am about to show is the Cboe SKEW index.


This index tracks the value of “crash puts” on the S&P 500 — inexpensive puts that money managers buy just in case something bad happens …



As you can see by the green line, the index is at a two-year high!


But actually, if we go back in time, one will notice that the two-year high is actually an all-time high!


“Really cheap” puts are as expensive as they have ever been …


Here is the thing though …


That’s bullish for the S&P 500, and bearish for volatility!


Think about it this way …


If I thought the market was about to crash would I buy cheap puts?


The answer is no.


I would buy meaty puts that can make money almost immediately.


These “cheap” puts need a SERIOUS move to even come into play.


The puts that are making the SKEW index move are the 3000-strike puts and lower.


This means there is demand for the cheap stuff … the “just in case” stuff.


This is showing me that big money is playing the market to go higher …


But … they want something cheap just in case …


I think this points toward more upside through July 4th.


I would short volatility, and go long on indexes.


Your Only Option,


Mark Sebastian

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