Edge of a Precipice
Updated
Will we ever see VIX at 16 again?
Here I explain the mean reverting nature of VIX.
Then I predicted exactly were VIX and JHEQX would be on Friday, October 7th.
Now we're sitting at the edge of a precipice of the worst financial disaster in history.
So I wrote an indicator to give us retail traders an inside eye so maybe we could catch a long vol opportunity of a lifetime.
If you understand how a large institution positions assets and how they hedge against a market correction you can a) find these hedges and b) use dealer positioning to predict it.
That brings us back to VIX.
Vix is calculated using SPX Weekly options rather than stocks.
If Vix sustains higher levels for longer it is telling us liquidity is bad.
As more institutional players position to the downside eventually there will be too much money on the same side of the boat and the boat will flip.
Think of market participants as people on a boat and the waves are volatility.
As the seas get more violent (swings up and down in market price) people on the boat are going to try to find a position best suited for the volatility.
Ask yourself now, is buying puts a good way to hedge downside?
No.
Fixed strike implied volatility is a disaster.
It has been collapsing for nearly the entire year.
Institutions protecting assets (like British pension fund managers apparently) with puts are getting worse and worse returns hedging with puts.
You may be able to pick off edge as an active trader by buying well timed Puts and cashing in on premium kick for a quick 100% return, but these fund managers holding puts are getting destroyed.
Instead, institutions are piling into selling puts while shorting stocks.
We all know what happens when too many shorts pile in, they frequently get squeezed.
I was expecting short squeezes to take hold when Oil started climbing.
Because the alternative is JHEQX leaning negative into an already crowded short side and a VIX > 32.
And that is exactly what nearly happened on Friday.
If futures drop overnight or price drops below 3580 JHEQX will start selling and the only thing stopping a drop to 3200 will be the FED with its left tail tucked between their legs with some fresh QE.
As a great philosopher once said.
"Dread it. Run from it. Destiny arrives all the same. And now it's here"
Here I explain the mean reverting nature of VIX.
Then I predicted exactly were VIX and JHEQX would be on Friday, October 7th.
Now we're sitting at the edge of a precipice of the worst financial disaster in history.
So I wrote an indicator to give us retail traders an inside eye so maybe we could catch a long vol opportunity of a lifetime.
If you understand how a large institution positions assets and how they hedge against a market correction you can a) find these hedges and b) use dealer positioning to predict it.
That brings us back to VIX.
Vix is calculated using SPX Weekly options rather than stocks.
If Vix sustains higher levels for longer it is telling us liquidity is bad.
As more institutional players position to the downside eventually there will be too much money on the same side of the boat and the boat will flip.
Think of market participants as people on a boat and the waves are volatility.
As the seas get more violent (swings up and down in market price) people on the boat are going to try to find a position best suited for the volatility.
Ask yourself now, is buying puts a good way to hedge downside?
No.
Fixed strike implied volatility is a disaster.
It has been collapsing for nearly the entire year.
Institutions protecting assets (like British pension fund managers apparently) with puts are getting worse and worse returns hedging with puts.
You may be able to pick off edge as an active trader by buying well timed Puts and cashing in on premium kick for a quick 100% return, but these fund managers holding puts are getting destroyed.
Instead, institutions are piling into selling puts while shorting stocks.
We all know what happens when too many shorts pile in, they frequently get squeezed.
I was expecting short squeezes to take hold when Oil started climbing.
Because the alternative is JHEQX leaning negative into an already crowded short side and a VIX > 32.
And that is exactly what nearly happened on Friday.
If futures drop overnight or price drops below 3580 JHEQX will start selling and the only thing stopping a drop to 3200 will be the FED with its left tail tucked between their legs with some fresh QE.
As a great philosopher once said.
"Dread it. Run from it. Destiny arrives all the same. And now it's here"
Comment
Still not negative yet but that liquidity added at 3600 on ES seems like it could be a catalyst to flip JHEQX to selling delta.Comment
That ICE is thickIf it breaks... no coming back from that.
Comment
Update the VIX line.Talk about where the rubber meets the road.
Comment
32 VIX implies a 2% move. SPY flagging 355 on 3 min.Comment
big bounce after absorbing 3600 and still positive.
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.