The S&P 500 closed right on the line I drew last weekend. That is not what has my attention.
Index volatility just collapsed to a 20 year low. Single stock volatility is raging at the same time.
That split is the most dangerous setup in this market right now.
The Market Is Lying Flat
Most traders watch the VIX and call the market quiet. The VIX sits at 15 today.
Short duration index options now price an 8 to 10 volatility. That reading has almost nowhere left to fall.
Single stock volatility tells a different story. Tesla carries a 40 volatility while the index sits near 10.
Intel just printed its highest implied volatility in 15 years. The stock is exploding higher at the same time.
Why This Is The Correlation Trap
This is the dispersion trade. Hedge funds sell cheap index volatility. They buy expensive single stock volatility.
That trade has crushed implied correlation to a record low. The math snaps back every single time it reaches these levels.
Here are the readings flashing red in this weekend’s update:
Implied correlation sits at 27%. The 20 year average is 47%. This is close to the lowest reading in two decades.
The last two correlation blowups were 2008 and 2020. Both spiked toward 80%.
Tesla carries a 40 volatility. Index volatility sits near 10. That gap is wild.
Intel just posted its highest implied volatility in 15 years while the stock rips higher.
The VIX trades at 15 today. Futures already price it back to 20 within 54 days.
No one is hedging right now. The VVIX sits at its lowest reading of the year and skew is dead.
Every one of these factors alone means nothing. Stacked together they point to one outcome.
What This Means For Your Trades
Here is the rule. Do not sell index options right now.
You are selling rock bottom premium. When this market snaps, that trade ends accounts.
The VIX trade is already gone too. The futures price the move in well before you can buy it.
Next week prices only a $100 expected move on a five day week. Index volatility has nowhere to go but up.
I break down the full setup and the trades I am watching right now in this weekend’s video.
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