Today versus 1999
For all you technically minded traders out there, here is an interesting article comparing today’s market action with the market at the height of the dotcom bubble. We’re not saying the market is going bust. But the similarities are striking. And as the old saying goes – history may not repeat itself, but it sure does rhyme. Read article here.
The VIX is creeping along the bottom of its range
As the market roars higher the VIX gets lower and lower. Today, we are cruising around the 12.00 handle. Last year’s blowout in December took the VIX up to 35. The SPX had gotten to around 2950 in September 2018 and by the end of the year it had dropped 600 points. Not that we are in for another bug drop, but it is time for caution. The VIX is called the fear index because it measures the market participants concern that a pullback may be in the offing. A low VIX says NO FEAR!!! But we all know what can happen, when the bullish sentiment gets euphoric.
VIX and Option selling
As a beginning options trader you may be wondering what VIX has to do with placing options trades. Well, when selling options, we want to collect premium, which is a function of volatility. The higher the demand for options the higher the price and the higher will be the volatility. We want to Sell, when volatility is high and buy back our position, when volatility is low. When markets suffer a pullback, buyers rush in a try to buy protection against the downside move. This drives the price of options upward – they become more expensive. If you sold at low vix, you’d be buying back at a high vix and you’d lose a lot of money. With volatility is low as it is now, the chances of it running much higher are very good.
The implied volatility (IV) of many of the big name stocks is getting very low. For instance the SPX ( S&P 500 Index) has an IV rank of 0.8. We consider IV below 20 to be low IV. This tells us these stocks are hitting all time highs and what goes up, often can go down.
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Now is a good time to keep yours eyes on that light at the far end of the tunnel. It might just might be a freight train coming straight at you.
