The stock market’s crystal ball is STILL warning there’s trouble ahead.
And, due to the nature of how these options trade (which you can review here), this condition told us to expect the VIX to trade higher.
And, since a rising VIX usually goes along with a falling stock market, we figured stocks would be lower.
Our crystal ball was right… sort of.
The VIX was at 22.50 back then. It closed near 26.50 on Monday. That’s a gain of 18%.
Oddly though, the stock market is moving higher too. The S&P 500 was near 3400 two weeks ago, and it closed Monday at 3500.
That’s not normally how this works. But, “normal” is not a term we can apply to much of anything that’s going on in the stock market these days.
Nonetheless, decades of data tell us that lower stock prices go along with a sharply higher VIX. The action over the past two weeks conflicts with that. So, let’s peer into the crystal ball one more time and see if we can resolve this…
The VIX traded yesterday at 26. The VIX September 16 $26 call options were priced at $4.20 per contract. The VIX September 16 $26 put options were priced at $1.70.
In other words, VIX call options are 2 1/2 times the price of the puts.
If we go out to October, the VIX October 21 $26 calls are $8.60 per contract. The equivalent put options are just $1.20.
The calls are 600% more than the puts!
Despite an 18% rise in the VIX over the past two weeks, VIX option traders are STILL betting on an even higher VIX in the days and weeks ahead. In fact, they’re willing to pay six times the price to bet on a rising VIX than a falling VIX as we get through October.
Of course, it’s possible that we may see more of what happened over the past two weeks – where the VIX and the stock market both rallied together.
But, given all of the other warning signs we’ve noticed over the past month or two, it seems far more likely we’ll see something more along the normal lines – a rising VIX going along with a falling stock market.
Traders should be careful here… The market’s crystal ball has a very good track record.
Best regards and good trading,
In today’s mailbag, a Jeff Clark Trader subscriber gives their feedback on last week’s big presentation…
Thank you, Jeff! I watched you and your son do a trade on Wednesday night. I would’ve loved to sign up, but I lost my job due to my long-time employer getting rid of all her employees. Things are tight right now, but maybe by October I’ll be ready? Depending on my job situation.
I hope your son enjoys his first year at college, and hopefully things will be back to normal soon. Thanks for all your valuable wisdom. Best wishes.
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].