For the past few weeks, volatility has been declining.
The Volatility Index (VIX) closed recently at about 12. That’s near the lowest level of the year. And, speculators are betting that it falls even further.
But here’s what they’re forgetting… Periods of low volatility are always followed by periods of high volatility – and vice versa.
According to the most recent Commitments of Traders report released last Friday, traders have amassed a record high short position in VIX futures contracts. VIX shorts now exceed 200,000 contracts. That’s larger than the previous record of 193,000 contracts in January of 2018.
You might recall that back then the VIX traded below 10 – a sign of extreme complacency. And folks were placing big bets that volatility would remain low.
Folks were wrong.
Three weeks later the VIX closed above 37. The popular “short the VIX” trade got crushed. Heck, even one of the popular leveraged inverse-VIX funds was completely wiped out.
Fast forward to today, where the VIX is trading near its lowest level of the year and folks are aggressively shorting cheap volatility. That’s a dangerous trade.
Take a look at this chart of the VIX along with its Bollinger Bands…
The Bollinger Bands (the blue lines on the chart) are pinching together. And, the VIX is trading near its lower Bollinger Band. It’s building energy for a big move.
This setup has happened twice before in 2019 (the red arrows on the chart above). Both times, the VIX was sharply higher a few weeks later.
Short positions in VIX futures contracts were fairly high back in April and July. But, they were nowhere near the level they’re at today. If the VIX does indeed start to move higher from here, then it’s likely to cause a lot of pain for those speculators.
I don’t think we’ll get the remarkable move we saw in early 2018. But, I suspect that by Thanksgiving – or perhaps even sooner – the VIX will be much higher than where it is today.
Best regards and good trading,
Jeff Clark
P.S. Anyone that knows me knows I don’t often attend investing presentations or webinars. Maybe I’m a bit stuck in my ways. But, it takes something really special to get me to tune in.
Tonight’s one of those rare nights where I make an exception.
My friend and colleague Teeka Tiwari has uncovered a trading system unlike anything I’ve seen before. As he puts it… if you have a few times each month to devote 12 seconds to his strategy, you could end the month $12,000 richer.
It’s hard to believe. But, he’s going on camera tonight to explain everything. If you’d like to tune in with me, and you haven’t signed up yet – do so right here.
Reader Mailbag
Today a Delta Report subscriber shares her gains from Jeff’s recent recommendation… (Subscribers can access the sell alert right here)
Sold one of your recommendations for a 68% gain. I am happy with 68% gains, even if it’s only a couple hundred dollars.
Still being cautious as I try to wrap my head around actually buying and selling options as options, rather than bets on a lower price to buy a stock or extra income on a stock I already have. Thank you.
– Beth
On Monday, we asked if you thought the economy was due for a recession. And you responded…
There are several indicators that we are going into a recession, so I believe we are headed there. Timing is always the tricky part but my bet is mid-2020. I am regularly pruning my stock portfolio and going to bonds.
I am a subscriber to all of your services. Keep up the good work.
– Robert
I feel we are due for a recession, but I felt for years it would be because of the excessive debt.
I’ve always read Bill Bonner, Doug Casey, Jim Rickards and Gerald Celente. What Jeff does is pinpoint it… His depth of knowledge, years of experience and ability, as a teacher would make me stay with him for the rest of my life.
– Bill
Thank you, as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at feedback@jeffclarktrader.com.