“Man, this stinks!” My oldest son, Grant, texted me yesterday, “I haven’t made a trade in two weeks. And I still can’t find anything that looks good.”
Of course, I understand the frustration. When you trade for a living, and your monthly rent payment depends on your ability to profit, it’s hard to look at the computer screen and do nothing. You want to do something, anything, to justify your efforts.
“Don’t force any trades, son,” I advised. “You’ll end up violating your discipline. You’ll take on more risk than you should. And, you’ll be worse off. It’s better for you to be frustrated and bored, than to be foolish and broke.”
Then, I explained why it’s probably a good time for him to take a vacation. Because the choppy, sloppy action we’ve seen in the market lately is likely to stick around for a few more weeks. At least, that’s what our crystal ball says.
Regular readers know I refer to Volatility Index (VIX) option prices as a crystal ball to predict the future market direction. When VIX call options are significantly more expensive than the equivalent put options, volatility is set to increase. And, that usually goes along with a falling stock market.
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When VIX puts are much more expensive than VIX calls, the opposite is true. Volatility is likely to contract. And, that’s usually when stocks rally.
At the moment, VIX calls and puts are just about equally priced. That means the VIX probably isn’t going anywhere, and neither is the stock market.
For example, when the VIX was trading at 20.70 yesterday, the VIX April 7 $21 calls were trading for $1.50. The VIX April 7 $21 puts were trading for about $1.
The call options were slightly more expensive than the puts. That suggests the VIX will likely be higher one week from today. And, that means stocks will probably be lower.
But, the price difference in the options is not large enough to indicate that we’ll see a BIG move in volatility, or in the stock market, over the next week – just more of the same choppy and sloppy action that has kept the S&P 500 in a tight trading range for the past few weeks.
If we glance out a little further, the picture looks the same…
With the VIX at 20.70, the April 21 $21 calls were trading yesterday for $2.30. The VIX April 21 $21 puts were priced at $1.70.
Here again, the VIX calls are more expensive than the puts. So, the bears have a slight edge in the market over the next three weeks. But, the difference in VIX option prices isn’t enough to suggest a big move.
It certainly isn’t enough of a difference to justify taking an aggressive stance in one direction over the other.
Instead, based on the look of the crystal ball, this is probably a pretty good time for traders to take a vacation.
“The good news though,” I mentioned to Grant, “is if the market can keep chopping around for a couple more weeks, it’ll build up plenty of energy to fuel the next really big move. You’ll have plenty of trades to make then.”
Best regards and good trading,
In today’s mailbag, Market Minute subscriber David thanks Jeff and Larry for their trading advice…
Hi Jeff, thank you for writing this article. You definitely hit the nail on the head about looking back at trades that continued to move in the direction you wanted it to go. I’ve been trading for ten years and know that I have a long way to go in my career. But I feel like I’m finally getting the foundation laid out that helps me gain money and lose less.
Taking profits is a big rule that I have. It’s from many times of staying in the trade, hoping for it to continue on, only to lose all of my profit because it decided to reverse direction. I like Larry’s way of saying it too – “put a ‘P’ on the paper every day.” Thank you for your insight, and very good advice that you continue to give the trading community.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming – and send us any questions – at [email protected].