VIX at 4 month lows; is the table is set for a pullback?

Jon Lewis

The recent market surge has wreaked havoc on volatility.

Today, the CBOE Volatility Index (VIX) logged its sixth consecutive down day.

The VIX has been sliced by more than half since peaking at the Christmas low on Dec. 26.The move has pulled the fear index below its 200-day moving average for the first time since October. It’s now trading below 16, which is within the range that we saw throughout much of 2018’s volatility doldrums.

This volatility implosion brings up two points.

First, volatility is being sucked out of equities across the board. Even post-earnings trades, which usually have some elevated premiums to work off, are routinely sporting implied volatility (IV) ranks below 20% (that’s depressingly low).

For example, two stocks that just reported earnings — Walt Disney (NYSE: DIS) and General Motors (NYSE: GM) — have IV ranks of 15% and 19%, respectively.Moreover, I just ran one of my normal trade scans, looking at stocks with IV ranks above 50% that don’t report earnings through March 15… and came up with just one name. That’s what a rapid 20% increase in stocks can do.

The second point is that the low VIX reflects a degree of complacency that is often bearish for stocks in the near term.

With overhead resistance nearby on the charts, stocks at their most overbought levels since September and the VIX at four-month lows, the table is set for a pullback.

I’m not saying it’s a certainty, of course, but the conditions are in place.


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About The Author

Meet Jon Lewis, With over 20 years of real experience, teaching AND trading, Jon will help you learn to use options profitably and safely in portfolios of any size.

His advantage, and now yours, is using simple, often overlooked spread options strategies which generate consistent income without significant risk.