The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide
The S&P 500 is at a decision making point.
Something big is about to happen….Take a look at the last 10 days of trading in S&P 500 futures.
I want you to notice something…4600 has been a magnet for S&P 500 futures.
This is why the SPX seems to be stuck between 4660 and 4690…
Every time the futures break below 4600, they end up getting bought the next day.
And when they break above 4600, futures are promptly sold.
This type of trading….called coiling can only last so long…
And the SPX has been coiling around this level for the last 9 days.
At the same time the VIX index has found a floor…
After bottoming last week, the index has been unable to break below 13…even as the SPX is moving less.
SO what is going to be a catalyst for SPX? Many think it might be non-farm payrolls…but I think it is going to be AAPL and AMZN earnings.
AAPL has been a juggernaut.
In this three month chart, I want you to notice that you can’t even see the 200 DMA…
If AAPL stumbles…it will take the QQQ down with it, which will pull the S&P 500 lower.
That would break this log jam we have at 4600.
If — along with Amazon — it manages to exceed the street’s lofty expectations…then the S&P 500 is going to BOOM higher and we could be talking about new all time highs.
So what do you do about it…
The answer is trade in zone 3 in SPX options…
Zone 3 is the area of SPX options that is seemingly being ignored…its range is 4-14 days…
Not close enough to expiration for the swath of retail and low end institutions dumping daily options and killing near dated vol.
Not far enough for the hedgers to play, they stick to 30 days plus…
In fact this is an area that is totally ignored by most traders and is I think the best place to buy options.
I would be a buyer of a strangle around 10 days to expiration and I would hedge off the risk by buying August VIX puts…
This is the type of trade I love putting on in the Trading Desk service and has been really successful as of late.
Questions about that? Leave a comment below!
Your only option,
Mark Sebastian