{"id":16453,"date":"2020-08-21T07:30:55","date_gmt":"2020-08-21T11:30:55","guid":{"rendered":"https:\/\/www.jeffclarktrader.com\/?p=16453"},"modified":"2020-08-21T07:30:55","modified_gmt":"2020-08-21T11:30:55","slug":"this-crystal-ball-sees-trouble-ahead","status":"publish","type":"post","link":"https:\/\/jeffclarktrader.com\/market-minute\/this-crystal-ball-sees-trouble-ahead\/","title":{"rendered":"This Crystal Ball Sees Trouble Ahead"},"content":{"rendered":"

Jeff’s note:<\/strong> One quick thing before we get to today’s Market Minute<\/em>…<\/p>\n

Next Wednesday at 8 p.m. ET, I’m putting on a live training session with my son Carson<\/a>, where I’ll teach him the trading techniques that allowed me to retire at 42. And, I’m releasing a free trade recommendation to all who attend.<\/p>\n

It’s shaping up to be a truly special event, and I don’t want you to miss it. So, if you haven’t already, be sure to sign up for it right here<\/a>.<\/p>\n

Now, on to today’s insights…<\/p>\n

\n

On Wednesday, as the S&P 500 traded at a new all-time high, within pennies of 3400…<\/p>\n

And as we witnessed a company hitting a $2 trillion market capitalization for the first time ever…<\/p>\n

The stock market’s crystal ball was screaming… “BE CAREFUL!”<\/p>\n

Volatility Index<\/a> (VIX) call options<\/a> are much more expensive than the equivalent put option<\/a>. And, whenever this condition exists, the broad stock market is vulnerable to a sharp and sudden decline.<\/p>\n

Regular readers know about the predictive power of VIX option prices. We’ve used extreme deviations in option prices before as a sort of “crystal ball” for the immediate direction of the stock market.<\/p>\n

You see, VIX options are not like most stock option contracts, which can be exercised<\/a> at any time.<\/p>\n

VIX options are European-style contracts – meaning they can only be exercised on option expiration day<\/a>. This eliminates any possible “arbitrage” effect (the act of buying an option, exercising it immediately, and then selling the underlying security for a profit). So VIX options will often trade at a discount to intrinsic value.<\/p>\n

For example, on Wednesday, the VIX closed at 22.50. At that level, the VIX September 16 $26 puts were intrinsically worth $3.50. But they were offered at only $3.00. That’s a $0.50 discount to their intrinsic value.<\/p>\n

If it existed on a regular, American-style stock option, you could buy the put, exercise it, and liquidate the position all day long – picking up $50 for every contract you traded. The European-style feature prevents that from happening – because you can only exercise the contract on the September 16 option expiration day.<\/p>\n

Because of this unique pricing structure, VIX options provide terrific clues about where most traders expect the VIX to be on option expiration day.<\/p>\n

The VIX September 16 $26 call options – which were $3.50 out of the money<\/strong><\/a> – closed Tuesday offered at $3.50.<\/p>\n

In other words, traders were willing to pay more for a VIX call option that was $3.50 out of the money than for a VIX put option that was $3.50 in the money. This tells us that traders making bets on the VIX expect the index to move higher over the next month.<\/p>\n

This sentiment is even more evident if you go out a little further and compare the VIX October 21 $26 calls to the VIX October 21 $26 puts. The calls closed Tuesday offered at $6.00, while the puts were only $2.50. (I use my trading quote system to track these prices, but you can find them at FreeRealTime.com<\/strong><\/a>.)<\/p>\n

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 October 21. And a rising VIX (meaning rising volatility<\/a>) usually accompanies a falling stock market.<\/p>\n

So, if you’re making short-term bullish bets, be careful. The VIX “crystal ball” has a very good track record. I’m betting it will prove correct this time as well.<\/p>\n

Best regards and good trading,<\/p>\n

<\/p>\n

Jeff Clark<\/p>\n

P.S. <\/strong>The volatility of the market has brought in a wave of new traders looking for the best way to make a profit during these turbulent times. And I know this firsthand… because one of them is my 18-year-old son Carson.<\/p>\n

Carson currently has no trading experience, but he’s become fascinated by what I do each day. That’s why on August 26 at 8 pm E.T., he’ll try to double his money by trading options<\/a> for big, short-term gains.<\/p>\n

Click here<\/a> to join me on August 26 at 8 pm E.T., and claim a free trade recommendation when you attend.<\/p>\n

Reader Mailbag<\/strong><\/h2>\n

Have you ever made a profit from watching the VIX options “crystal ball”? Or is there another reliable trading signal you use?<\/p>\n

Send us your thoughts \u2013 and your trading questions \u2013 to feedback@jeffclarktrader.com<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

On Wednesday, as the S&P 500 traded at a new all-time high, within pennies of 3400…<\/p>\n","protected":false},"author":43,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"ep_exclude_from_search":false,"service":"","footnotes":""},"categories":[1],"tags":[],"publication":[10],"person":[7],"newsletter-type":[],"ticker":[],"class_list":["post-16453","post","type-post","status-publish","format-standard","hentry","category-market-minute","publication-market-minute","person-jeff-clark"],"acf":[],"_links":{"self":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/16453","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/users\/43"}],"replies":[{"embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/comments?post=16453"}],"version-history":[{"count":0,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/posts\/16453\/revisions"}],"wp:attachment":[{"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/media?parent=16453"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/categories?post=16453"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/tags?post=16453"},{"taxonomy":"publication","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/publication?post=16453"},{"taxonomy":"person","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/person?post=16453"},{"taxonomy":"newsletter-type","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/newsletter-type?post=16453"},{"taxonomy":"ticker","embeddable":true,"href":"https:\/\/jeffclarktrader.com\/market-minute\/wp-json\/wp\/v2\/ticker?post=16453"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}