VIX Primed to Keep Falling
Option Traders, despite the slight drop in the market, the VIX took a nice dive today, mostly on the heels of a so-so fed announcement. You can listen to me talking about the Fed's affect on the market during today's "After the Bell" on FOX Business News from 6/20 below:
As stated the VIX took a real dive today, with its option vols also got crushed on VIX options:
Livevol (R) www.livevol.com
While in the recent month or so 17.25 might seem low, the index has been much lower over the last 6 months touching into the 14's and as many of you know has been as low as 10 for short periods of time. While I do not think we are going to see 10, I do think 15 or 16 is likely as all signs point toward a slow couple of weeks.
1. Europe has the ship righted (for now) and it does not appear anything is going to blow up there for at least a few weeks
2. No major Fed action left
3. No major economic data until July 6 (employment)
4. A long weekend coming in ahead of employment
5. As you can see above VIX option IV came in hard
A STEEP contango curve.
While it might seem counter intuitive when VIX futures are in a heavy contango and the slope between cash and the near month future is steep it is highly likely that the market is going to go higher and the VIX is going to continue to drop. At the same time, the VIX future is actually going to fall at a faster rate than the actual VIX. This sets all kinds of opportunities to play in VXX, XIV, and VIX options. It also points toward several futures spreads that could be highly effective.
For the less sophisticated, buying high yield dividend stocks and collaring them or buying protective puts is going to make sense for now I would collar as IV is going to drop. Once the VIX touches 15, I would stop selling the call and simply hold the put. Another interesting trade would be the 'cottle collar' or Sling Shot collar that involves selling a call spread instead of a simple call.
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