The Option Pit VIX Traffic Light Is Green: Volatility is likely to stay high.
The VIX started the day up by over a point only to end the day down by .52.
The S&P 500 was down over 60, only to close down just 7.65 points.
What changed as the day progressed to drive the VIX?
Hint: It’s not the stock market.
You see, the stock market is currently being led by the bond market and the dollar.
The chart below is the key to understanding what the market is going to do:
This is a one-minute chart of LQD-IEF.
iShares iBoxx $ Inv Grade Corporate Bond ETF (Ticker: LQD) is an investment-grade debt ETF.
iShares 7-10 Year Treasury Bond ETF (Ticker: IEF) is the 7-10 year Treasury note fund.
When this spread is dropping, so is the market…
When it is rallying, the market is going to go up.
The other chart is Invesco DB US Dollar Index Bullish Fund (Ticker: UUP):
As the dollar drops, the market goes up.
Right now the VIX is actually back in contango:
We are very close to flipping back to a yellow VIX light – meaning vol could go either way.
One more rally and that is going to happen.
So how do you trade this?
If we keep going, VIX is going to take it on the chib. The 24 puts are 17 … CENTS!!!
Buy those and hedge with a bull call fly in at the 30-35-40 strikes.
Questions? Drop a comment below or email me.
Your Only Option,
Mark Sebastian