Our crystal ball was right last week.
And it’s offering another vision for traders this week.
When we peered into the stock market’s “crystal ball” last Monday, we noticed the Volatility Index (VIX) calls were trading at a large premium to the price of VIX puts.
This is a warning sign that the VIX is headed higher. And a rising VIX usually goes along with a falling stock market.
Sure enough, the VIX rallied from 24.64 on Monday to more than 28 on Thursday. The S&P 500 dropped as much as 170 points during that time frame.
But by Thursday morning, traders who paid attention would’ve notice the VIX calls were trading for roughly the same price as the VIX put options.
The crystal ball was neutral. There was no edge to either side.
By mid-day on Thursday, the stock market started to recover and bounced through the end of Friday.
While stocks were rallying, the VIX was falling. And by the close of trading on Friday, the crystal ball was sending another signal…
The VIX traded near 24 on Friday.
At the time, the VIX July 20 $24 call options were trading for $1.60. Meanwhile, the VIX July 20 $24 puts closed were trading for $0.40.
In other words, traders were willing to pay four times as much for a VIX call option than for an equivalent VIX put option.
This tells us traders who are making bets on the VIX expect the index to move higher over the next few days.
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If we go out a little further and compare the VIX July 27 $24 calls to the VIX July $24 puts, the price discrepancy is even more severe.
The calls closed Friday offered at $2.80, while the puts were only $0.45. (I use my trading quote system to track these prices, but you can find them at FreeRealTime.com.)
VIX calls are far more expensive than the equivalent VIX put options.
So, VIX option traders clearly expect the index to move sharply higher between now and the end of July. And a rising VIX (rising volatility) usually accompanies a falling stock market.
That’s how it worked last week and we’re probably in for similar action this week too.
Best regards and good trading,
In today’s mailbag, Jeff Clark Trader member Don shares his thoughts on the future of the market…
I thought the major indexes might go back and at least test their all-time highs to around 15,000 on the NASDAQ 100 index. But every attempt keeps falling far short. So, I’m thinking we may be in a continued sideways pattern until at least the November election.
– Don K.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].