Volatility Is Finally Ready to Crash
VIX Traffic Light
Before we dive into today’s VIX forecast, let’s zoom out a little…
For the last six to seven months, the VIX has been trading at massive premiums. And that’s because something called the S&P 500 SKEW Index was holding it up.
Essentially, the SKEW measures the expense of far out-of-the-money puts. These are what I like to call “crash protection puts.”
Say you hold a ton of Apple stock. Shares are at $140, and you’re slightly worried they could crash lower to $120 on potential bad news.
Instead of selling your shares, you buy some far OTM $120 puts to protect yourself from that potential crash.
Well, by purchasing those far OTM puts, you’re holding up the SKEW – and therefore, keeping the VIX at a high premium, even though you aren’t necessarily bearish on Apple.
Over the past six or so months, crash protection puts have been through the roof. But now, that’s finally out of the way, with the SKEW down almost 10% in the past month:
S&P 500 SKEW Index, 1M chart from Google Finance
What does this mean? And where is the VIX headed now, without the SKEW holding it back?
If we get a rally in the S&P sometime in the next week, we could finally see the VIX make a new low without the SKEW holding it up.
For now, I think we’ll see the VIX get choppy – maybe up to 22 or 23 this week, then settle down around 18 as we head into VIX expiration next week.
As a result, my VIX traffic light is still yellow today. But we’re on the verge of red here…
We’re ready for a market rally that’ll finally crush the VIX below its 52-week low of 14.
Today’s Impact Money Trade
Alibaba Group Holding Ltd (NYSE:BABA)’s got a bit of an eyebrow raiser here:
A customer came in and bought a huge block of the December 2021 $40 puts – that’s 20,000 contracts for $0.17 each, with only two months to cash out.
This is exactly what I was just talking about – a crash put. It’s protection you put on a stock position in case that stock completely crashes – just like what I explained above.
Our big money buyer here is probably freaking out… and understandably so. They’re scared that China is going to turn this stock upside down on its head, just like it’s done with the rest of its equity market.
Look – you should either be staying away or shorting any Chinese stock.
Take a look at a chart of the so-called “Amazon of China:”
BABA, May-Oct 2021
Any time this name gets a lift, it immediately starts to break down again. And that’s because a bounce is just an excuse for the big money to sell their shares and pull it lower.
Don’t go down with the ship on this one. Stay away…
Or go short. Now, IV is expensive on this name. The cheapest straight puts I can find are the March $160 puts for $17. Honestly, the best way to play this one is with a butterfly or a spread trade to cut your initial risk.
Mark’s Watchlist
Today’s Watchlist has got more than just trades…
I have a special opportunity to tell you about.
1. Alcoa Corp. (NYSE:AA)
This aluminum producer is one of the first companies to report earnings, set for tomorrow after market close.
AA used to be boring. But aluminum has been blowing higher, its price nearing $3,000 a ton for a 30% jump in six months. And look how the stock has reacted:
AA, April-Oct 2021
This thing was a $30 stock back in April. This morning, it opened just above $48.
Don’t sleep on AA – it’s got teeth again. And I’m keeping a close eye on tomorrow afternoon’s earnings report.
2. FuelCell Energy Inc. (Nasdaq:FCEL)
Before we look at FCEL, let’s look at its cool older brother, Plug Power Inc. (Nasdaq:PLUG).
Both these names are involved in the hydrogen business. But where PLUG has had a stellar rally, up 34% in the past month, FCEL hasn’t quite caught the same fire.
But a rising tide raises all ships – and I think FCEL will be the next one to catch some momentum here.
The October 22 $7.50 calls are only about $0.20. And if FCEL makes a run up to $8, these calls could double or triple.
3. Goldman Sachs Group Inc. (NYSE:GS)
Banks have arguably been one of the best trades of the year. I mean, the Financial Select Sector SPDR Fund (NYSEARCA:XLF) is up more than 30% year-to-date:
XLF YTD
That’s why bank earnings have been so highly anticipated – and most of all, GS’s report, set to come out before the bell on Friday.
At least that’s what Kenny Glick has been most excited for.
GS has been one of Kenny’s best earnings trades every year. And with the current third-quarter earnings season potentially being the biggest in history, Kenny can’t wait for Friday.
And he’ll be live in the Warlock’s War Room to show viewers how he’s trading it this quarter.
Learn how you can join right here!
Until next time,
Mark Sebastian
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October 13 2021
Where are the results of your trades? Usually they are included in the archives section.