How the VIX Actually Works

VIX Traffic Light

The VIX continues to look really soft.

With the SKEW index at about 140 and the VIX futures curve in a steep contango, I think we could be looking at a sub-15 VIX by closing bell today.

By the end of the week, we could see 14 or lower, especially as the market continues on its slow trajectory higher. The S&P could hit 4,590 or 4,600 by Friday.

I haven’t seen volatility this bearish since the VIX was in the 60s over a year ago – and I can’t think of a better opportunity to start shorting.

On Thursday, I’m hosting a LIVE VIX trading session with an absolute expert on the volatility index, Russell Rhoads.

I used to work with Russell on the CBOE years ago. And this guy is still teaching me, a trading vet, more about trading volatility.

Want in on this session – and the Russell-approved VIX trades that’ll come with it?

Well, it’s for Profit Revolution members only. And now is a great time to join.

Click here to learn more about joining the Revolution, or give my team a call at 877.212.9163.

But on the surface, this VIX bearishness doesn’t make sense.

Inflation keeps rising. Labor shortages are plaguing U.S. companies. There are problems almost everywhere you look – problems people should be scared of.

So why is the so-called “fear index” dropping?

People think that the VIX represents fear. But really, it represents uncertainty.

Problems that we know about – inflation, labor shortages, COVID – those are already priced into the market. They aren’t additive to volatility, and they don’t raise option prices.

It’s unforeseen problems – problems that the market doesn’t have a grip on – that causes the VIX to go straight up.

That’s why the market doesn’t care about inflation right now. That’s why it can collapse down to the 11-range.

And remember, it’s normal for the VIX to trade this low. In 2019, in fact, the VIX never broke 25:

Click To Enlarge | VIX 2019, from Yahoo!Finance

From 2008 to the COVID crash of 2020, the VIX traded in the 12s more often than anything else.

So, this level is normal. Especially as the big-money managers get lazy with put protection.

Remember – my VIX light is red now. But in the coming months, we could see a real sell-off in the S&P now that crash puts aren’t there to hold the VIX up.

The VIX needs to drop before it can swell. And it’s finally dropping.

Mark’s Watchlist

We’ve got some new names on the Watchlist today – RDW, in fact, has only been trading for a couple of months!

Check out my take on these names – and how to trade them – right now.

1. Redwire Corp. (NYSE:RDW)

RDW is a SPAC that just started trading on the NYSE in early September – and it’s had some large gaps up since then:

Click To Enlarge

I think this thing has got more upside baked in. I wouldn’t bet the farm – RDW has a little bit of memeness to it – but the November $15-$22.50 call spread is only about $0.90.

This gives you $7.50 of upside for under a buck – and it’s a great risk-reward play on RDW continuing on its upside momentum.

2. Fastly Inc. (NYSE:FSLY)

FSLY has earnings coming up next week on November 3 – and I think we could see a run up into the announcement.

The 200-day moving average (MA) is a little above $60 right now:

Click To Enlarge | FSLY Aug-now + 200-day MA

I think FSLY will jump to meet that MA – and we can play it with the November 5 $55-$60 call spread for less than a dollar.

The chart you see here is from my customized Asymmetric Trading System. It allows you to add a whole arsenal of indicators to any stock chart you can think of – moving averages, Bollinger bands, implied volatility, you name it.

And you can get access to use it yourself. Click here to learn how!

3. Merck & Co. Inc. (NYSE:MRK)

MRK has earnings before the bell tomorrow morning – but there’s almost no earnings premium priced into the stock.

For MRK, it’s all about the COVID pill – the first oral treatment for COVID-19.

That means options are cheaper than they should be heading into earnings, forming a great opportunity for a pre-earnings play.

The November $82 calls are less than $1.70 right now. That’s only about 2% of the value of the stock – and considering what MRK’s got in their pipeline, it’s a great inexpensive upside play.

Today’s Impact Money Trade

We’re looking at big money flow out of Brazil right now:

Click To Enlarge

There’s incredible trading volume in the Petroleo Brasileiro (NYSE:PBR) $11 calls expiring this Friday, the 29^th.

There are rumors around re-privatization of the oil company, which fueled some upside speculation in the stock – about 84,000 contracts’ worth.

This has been a poorly managed company. But it’s an oil company, and oil prices are rising. If they can figure out their management, then there’s a ton of upside potential in this name.

I mean, PBR was a $200 stock when I was trading it on the floor. It’s got to go higher from here – and this is a stock that I definitely want to piggyback.

I’m looking at an investment-style trade on PBR today.

That $11 strike is looking pretty good – but let’s go a little further out.

The January 21, 2022 $11 calls are only 70 cents. And to me, that’s a great way to play this name with some longer range…

And you don’t have to risk more than $100 to get there.

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There’s only two days until my LIVE volatility trading session with Russell Rhoads on Thursday.

This session is going to be packed with trade ideas – and that means we need to keep the group small.

So, it’s only for Profit Revolution members. But there’s still time for you to join the Revolution…

And get access to all the perks a membership has to offer.

Click here to check them out and become a member TODAY!

I hope to see you in Thursday’s session…

Mark Sebastian
Founder, Profit Takeover

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