The VIX Is Walking Around Blind
Broadcom is nowhere near earnings.
Look at its options, though, and you’d swear it reports tomorrow.
That jumped out at me yesterday afternoon, and I passed on a trade because of it. If you check the VIX to see whether it’s safe out there, it’s telling you one thing. The options market is telling you something else entirely, and by the end of this, you’ll know how to read it yourself.
Options Are Insurance
An option works a lot like an insurance policy on a stock. Like any insurance, the price goes up when people expect trouble.
Part of that price is what traders call implied volatility. It’s how big a move the market expects, built right into what you pay.
Every stock has options that run out on different dates, like this Friday, next Friday or next month. The pattern of prices across those dates is what traders call the skew.
Usually, the options that run out this week are priced for a calmer ride than the ones that run out next month. Less can go wrong in a few days than in a few weeks.
When that flips, and this week’s options are priced for a bigger move than next month’s, traders say the skew is inverted, which means it’s upside down. It’s like a one-week insurance policy costing more per day than a one-month policy, and it only happens when people think the storm is close.
Every Tech Stock Is Paying Up
Pull up the skew on individual tech stocks right now, and almost every one of them is upside down.
Broadcom is completely out of the earnings cycle, and its short-term options are priced like a report is coming. Google’s are funky too, and Google doesn’t report until next week. Even Apple’s are so elevated you’d ask yourself, does Apple have earnings today?
You see that around earnings plenty of times. One this big, in almost every single tech product, I’ve never seen.
And it’s not about earnings. In the QQQ, the fund that tracks the Nasdaq-100, this week’s options are priced for a big move, and next week’s drop right back off. Next week is when the bigger reports hit.
So there’s only one way to read it. Get ready to rumble. The market is a lot angrier than people are giving it credit for.
Why The VIX Misses It
The VIX doesn’t look at any of those stocks. It’s built from S&P 500 index options with more than 23 and less than 37 days left until they expire. Everything shorter than that doesn’t count.
All the action is in those short-term options right now. So the VIX is walking around blind, looking calm while this week’s options are screaming.
If you own an index fund and you glance at the VIX to see how nervous the market is, you’re looking at the wrong number this week.
Look at the expected move instead. It’s how far up or down the options market thinks a stock or index could go in a set amount of time, and you can find it in most trading apps. Right now, the S&P 500 index, the SPX, the mother of all products, is still pricing a $165 move this week.
That doesn’t mean we have to move $165, and it doesn’t mean the market has to tank. It means it’s going to move, so think protection. I’m using spreads, I’m trading small and I want to go home flat.
To your success,
Don Kaufman
