Yo, Pit Crazies,
The market has been grumpy since the Fed went with a .25 basis point raise two weeks ago.
The good feelings prior to that were too good, it turns out.
Since then, the SPDR S&P 500 Trust ETF (Ticker: SPY) has dropped 20 points to abruptly stop at the 200-day moving average and close above the 50 dma yesterday.
Those sure sound like inflection points.
Over the past couple of weeks, one Fed governor lifted us up and another brought us down.
It’s the equivalent of surgeons arguing about your heart transplant in the OR instead of agreeing on the strategy behind closed doors.
But this type of balloon floating is nothing new for the current hyper-politicized Fed. Set your trading watch by Fed speakers these days.
This grumpy selloff has, however, produced an extraordinary outcome in VIX …
Two-week SPY chart with one-day candles
Let’s check it out.
VIX Has Been Stuck
VIX has been in “Zone 3” (17-23) this year. That is not bull market vol, it’s choppy market vol.
I refer to this level as “orbiting” volatility. The markets move enough every day to keep vol elevated … but, really, the SPY goes nowhere fast.
Now, 5% down in two weeks is something. But it’s not 5% in two days like 2022.
That has produced expected moves in VIX that are as low as I have seen them for as high as the index is.
Strangle trades work great if I think the underlying will break out of the range. Right now the VIX March 22 19/22 strangle is $1.48. That means a break-even at 17.52 or 23.48 – just sitting on the edge of Zone 3, bottom and top.
We have a non-farm payroll number coming up and another Fed meeting on March 22. Traders are betting there is next to no action between now and then and volatility will bounce around in Zone 3 for another three weeks.
What do I think? Prepare for 3 more weeks of chop.
My SPY bias is still bullish, mostly because the upside volatility in VIX is darn cheap.
No one wants to buy the upside in VIX. Long VIX, long SPY has potential into the Fed meeting.
The Rundown: What’s Winning Around Option Pit
Big Money Flow
Mark closed a Wayfair Inc (Ticker: W) Apr21 40/30 put vertical closed for an 80% gain
To Your Trading Success,
AG