Where Are We At?

Markets are marginally positive today.  This would make 4 days of buying in the last 5 days,  which sounds like a lot till one sees how many days in a row the market absolutely got mauled by sellers.

The market is now down a little over 20% from the highs.  2700ish would make it down almost exactly 20%, an interesting target for today if the markets get a head of steam.  That said, I am extremely wary of where buyers go tomorrow when we begin a new quarter. I think some sort of retest is inevitable given the current price action of the market.  Despite that belief I am a seller of puts in names I really like and even a strategic call buyer in the right stocks.

Looking at the VIX itself, it DOES appear to be slowing.  The VIX is finally below 60 and vol of vol (the VVIX) is falling.  The second chart with the red line below is a proxy for VVIX if not the exact calculation:

However, until we see a real drop in SPX volatility, VIX is going to stay in the 40s and 50s,  which could be a while. For example if the SPX movement falls to ONLY 2% a day (ha only), the VIX could still trade in the 40s as there will be a HUGE risk premium built into options for months.

In addition, despite the run in the SPX, the VIX is backward which makes anything but short runs in the SPX hard to believe in:

For the time being, our traffic lights are all yellow, meaning every trade needs to be strategic.

Option Pit Traffic Light

SPX:  YELLOW

SPX IV:  RED

VIX:  YELLOW

VIX IV:  RED

VXX:  GREEN

Your Only Option,

Mark Sebastian

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