SPX rallies to 2800 and stops

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SPX to 2800

  The SPX rallied to 2800 and stopped dead in its tracks.  The prospect of no new tariff rounds gave the market some hope but we have been here before.  For a brief moment in time VIX opened negative on a Monday.  Weekend adjusted that is more like .60 drop and spent the rest of the day climbing back to near 15 as SPX gave back most of its gains.

VIX can rally early into an SPX selloff

  This is a text book reversal lead by VIX.  For a reasonable SPX rally to hold, VIX should flatten and decline some.  When we have a gap on news and a big move in SPX, a VIX rally usually signals an end to the party as the player buy some SPX index puts.  There was substantial risk reversal action in VIX today with call spread buyers and put spread sellers picking up contracts on the open.  This happens often when the “news before the news” gets folks excited and then there is buyer’s remorse.  The possibility that the WH can change its mind once again looms large. Chart from Cboe Livevol Pro

VIX future premium is contracting

  Will we continue to rally or cool off?  I thought 2800 was possible last week and we got here a bit early.  Where does SPX go if there is an about change and the tariffs get slapped on at the end of the week?  2700 and south is of course the easy target.  At this point we still are in the Tarriff news cycle for SPX so that makes volatility products dependent on VIX futures.  The contraction in VIX future premium leaves a muted short term downside.  The run up in VIX cash today slows the erosion in VIX futures down to a trickle.  With the compression in the VIX cash and futures the upside play for the volatility products is very real.

The Trade

  VIX call spreads are very cheap right now in the Mar19 cycle, as are longer term VXXB puts.  They make a nice pair. Disclosure: VIX, VXXB and SPX positions Follow Andrew@optionvol Follow Mark@optionpit    

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