The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To Drop.
The VIX could not break 20 yet again on Thursday.
It is going to take another serious sell-off to make that happen.
But how much more selling can there be?
Let’s start with where the selling is coming from.
It’s from the ‘high beta’ names; these are stocks with high valuations and little profits.
You know them … Robinhood (Ticker: HOOD), Zoom (Ticker: ZM), Coinbase (Ticker: COIN), Twilio (Ticker: TWLO), Spotify Technology (Ticker: SPOT) …
Basically if ARK Innovation ETF (Ticker: ARKK) holds it, it’s high beta.
This is why ARKK has been so bad the last six months:
About every stock they hold has the same pattern.
This is putting heavy weight on the Nasdaq 100 (Ticker: NDX).
It has been able to hold up because of the mega-cap names, like Apple (Ticker: AAPL), Microsoft (Ticker: MSFT), Nvidia (Ticker: NVDA), Tesla (Ticker: TSLA), etc.
While this selling has happened, we have seen the CBOE Nasdaq 100 Volatility Index (Ticker: VXN), the VIX of the NDX, take off, even if the VIX itself has not.
The relationship between VIX and VXN is starting to get stretched:
The chart above is the relationship between VIX and VXN.
VXN is now trading 6 points higher than VIX. It has not traded at that big of a premium since May 2021.
The absolute widest it will get is about 11, and generally it trades about 1-2 points higher than VIX itself.
So what does this mean? We are starting to get to the point of a snap back rally …
Or the VIX is going to pop.
At this point I would lean toward the former.
I think we are getting to the point where some put selling in the Invesco QQQ Trust (Ticker: QQQ) or NDX makes some sense.
The QQQ Jan. 21 370-strike puts are around about $2.85.
They are a good sale. If you wanted to make it a spread, you can sell the 370-350 put spread at $2.00.
That’s an 11% return on risk for about two weeks of hold time, 5% out of the money.
I think it will pay.
Your Only Option,
Mark Sebastian