Traders tend to get complacent in a low volatility environment. The big question is, how low is low?
The Volatility index (VIX) is resting at a major level of support while at the same time printing a Ready, Aim, Fire!® (RAF) buy signal. Is a potential flush in the market around the corner? Maybe, and it could be a potential heads-up.
Sudden, aggressive flushes to the downside in the markets are typically met with or triggered by an explosive move out of the VIX. If you look at recent flushes in the markets in both August and September the VIX was roaring higher.
With this current RAF buy signal setting up we are left wondering if this October will be a repeat of last year — a big flush followed by a spike back to highs followed by another aggressive flush lower. While there’s no guarantee, the signal on the VIX at least suggests this is a good spot to trim profits on longs, especially as the indexes are extended.
A rise in volatility will also favor certain options strategies more than others. For example, long options tend to suffer in low volatility markets and tend to explode in value when the VIX spikes. When you take this all into consideration, long puts on the indexes would offer tremendous potential for big returns if that buy signal in the VIX turns into something more than a signal.
During our Focused Trades Premarket Prep session on Monday morning this is the first place we’ll take a look at as we begin to put together our next round of potential trades. Until then we advise being cautious on the upside here.
Stay Focused!