This Sell-Off Is Not The Same (Here’s How To Trade It)

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

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