VIX rides to new lows

Hello Pit Crazies!


You may have noticed that my Twitter alter ego, Vol Man, has been joining my posts.


How will he help you become a better trader?


Every time he appears, you will know that we are at an “inflection point” in volatility — that’s how!


It is important to you, because it indicates when the market can — or is about to — change sentiment.


Candlestick chart of VIX for the last 2 years


After all the Cboe Volatility Index (VIX) is the fear gauge, though it is more accurate to call it the sentiment gauge so read on how it will help you be the best trader you can be. 


If you are paying close attention, there are four (mostly) horizontal lines across the VIX chart above.


Those are what we call “VIX Zones” and they’re an Option Pit exclusive.


VIX zones are broken into four quartiles, as follows:


VIX Zones Sentiment

Zone 1: 9-12 VIX Happy days are here again and we’re very bullish

Zone 2: 13-17 VIX The market is getting frisky with some doubts

Zone 3: 18-23 VIX At least one macro event is causing worry

Zone 4: 24-plus VIX Major macro problems are leading to loss of confidence in stocks


The zones are important because they describe a phase of market activity. Zone 1 is a quieter bull market … up to Zone 4 where things are coming off rails and the world is going end.


What you probably noticed from the VIX graph is that VIX spent extended time in Zone 4 in the past 12 months.


In fact, the 200 day moving average for VIX is 25.26 …


Meanwhile, the S&P 500 Index (SPX) hit all-time highs.

But SPX/VIX is slowly coming out of that.

The new lows look suspiciously like old highs … or really just settling back into the middle of the VIX range. 

In my parlance, the VIX on Thursday dropped into Zone 2 for the first time in a year. That’s a big deal because: 

VIX ZONE = SENTIMENT = MOVEMENT EXPECTATIONS

Every time VIX is on the cusp of a Zone Change, it brings in a new downside target … the bottom of that zone is now the downside target.  

Remember these are quartiles from top to bottom in VIX. Not to get too mathy on you … but VIX has to get into a quartile first before it can get to the bottom of it.

I expect a lower VIX number this week barring UNFORESEEN CRAZY GLOBAL MELTDOWN.

We’ve been in new territory for the past year. Anything can happen overnight to cause a VIX spike — and it takes the elevator up and the escalator down. 

If any of this is confusing, we meet weekly in the Vol Trade Club to sort it out

Stay tuned for my next post on Wednesday as I link this with another volatility condition … realized volatility in the SPX.

(Hint: It is lower than 17 VIX.)

The Rundown

Sharp Bets: Mark runs our marquee long option strategy. SB specializes in low implied volatility calls and puts and managing trade size for a risk-adjusted portfolio of options.

And, yes, Mark has seven wins in his last 10 Sharp Bets trades. There, I said it again.

Retail stocks still look good as money flow (as in option buying) was still strong into the end of the week.

Volatility Edge/Volatility Trading Club: Vol Edge is showing that the proprietary Option Pit VIX Light Is Red, which means VIX futures are in contango (futures price is higher than the spot price).

That means it is very hard for iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) to pop with such a high overhang of future premium.

Vol Edge Trade No. 78 is up 100% with half the long puts still to close.


The VIX traded 17 on Thursday into the three-day weekend. I expect VIX to markup with the Weekend Effect, but the big tell is if VIX can maintain the Monday rally from that effect.


I am STILL waiting for VXX and Pro Shares Ultra Vix Short-Term futures ETF (UVXY) reverse split announcements. I am still leaning short BOTH VIX and VXX.


Trade No. 238 is the last trade I closed. I sold the puts to pay for the calls and take in a nice credit and still stay short delta in VXX. Can’t lose is a good place to be for this one.  


Remember, a lot of vol strategies I use are market neutral. That means if SPX or VIX go up or down, the positions still make money. This is a technique you can learn in the Volatility Trading Club and Volatility Edge!


Trading Legion 


The Trading Legion is an intermediate-level education and a long strangle trading vehicle.The goal is to teach students the best times to buy options.


We opened a CME strangle that closed down around 5%. The CME is listing Bitcoin mini-futures to trade and this is a bet the reddit/YOLO crew will hop in big toward the listing date on May03.

 

The Apple Inc. (Ticker: AAPL) strategy stopped the bleeding this week so I can hold for another week at least since the long call butterflies I own are very close to making this trade a nice win. As of now the trade is down about 20%.


Robinhood Trader: Robinhood Trader uses a proprietary Option Pit scanner to find order flow anomalies in the Robinhood trading activity.


Mark closed eight Marathon Oil (MRO) Apr16 10 calls for well over 100% gain … and two Nike (Ticker: NKE) Apr09 calls for 50% profit. General Electric (Ticker: GE), General Motors (Ticker: GM) we did not go well, but since they were sized right, the gains are covering the losses there.

 

Pro Trading Room: This is Option Pit’s live access to Mark and myself during trading

hours. Our Pro students post trade ideas with Mark and me all during the trading session.


The big news here was Discover Communications (Ticker: DISCA), ViacomCBS (Ticker: VIAC) and the Bill Hwang implosion early in the week. Both of those stocks have leveled off somewhat, so the short put strategies are doing best.


Remember only sell puts in stock you can afford to own.


The Pro Room produces about 30 actionable ideas per week. These were a couple of my favorites from the Roomies …


  • MARA May’21 43C were closed for a 5pts gain. That was one Roomie using the idea of another.

  • BTO $BAC Apr30 40c

  • BTO VIX Apr21 17 puts and VIX May2119 puts as we dropped into Zone 2. I am long some legacy upside calls from my VTC strategy, so I am using the calls to buy more puts. Once again use Vol Trade Club to sort it out.


The Lesson

VIX is a great sentiment indicator. Anytime VIX changes zones, the market changes sentiment and I make sure I am set up to profit in that direction.


To Your Trading Success,


“AG”

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