Volatility May Remain Elevated In Option Frenzy Regime

Stocks rose on January 20, with the S&P 500 gaining about 1.4% to close at a new high, 3,851. Meanwhile, the Qs traded higher to around $323.75. Today’s move-up helped to bring the VIX index down to 21.6, which has been the very lower bound of the VIX trading range.

We really need to ask ourselves this question, are we in a new higher implied volatility regime? This is really important because if Vol still has much to fall, then the S&P 500 could see an epic melt-up. If this is the floor is in the VIX, then a melt-up scenario is less likely, with the better odds being a pullback.

S&P 500 (SPY)

The S&P 500 is nearing the upper end of the trading range, but the RSI is only at 67. So it would not surprise me to see the index push a little bit higher. Maybe 3,870 or so.  There is still a good chance for 3950, but it all depends on how fast the market moves higher from here. If it can do so at an orderly pace, then odds for higher 3950 grow better. A lot of that will be determined by where the VIX goes. So this why it is critical to understand the VIX’s place. I am beginning to believe we are in a volatility regime change, and VOL will stay higher; you will see why I feel that way as we move forward in this write-up.

Apple (AAPL)

Apple rose by around 3% today, but that wasn’t all that went up. Call volume surged today, and 30-day implied VOL rose to 41% from 39.5% yesterday.

Amazon (AMZN)

Amazon rose by more than 4.4% today, and it saw its highest call volume in months, wits it’s Implied Vol rising 38% from 37.4%.

Typically, with big moves higher in stocks, you see Volatility come down. Now earnings are next week for Apple and the week after for Amazon. But it seems more likely that on a big up day with heavy call volume rising Implied volatility has more to do with market maker pricing. So, if we stay in this present state of big option trading, volatility will have a tough time come in.

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Disclosure: Mott Capital Management, LLC is a registered investment adviser. Information ...

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