Traders were a bit leery of some potentially volatile events this week, but so far they have not proven to be troublesome. The NVIDIA (NVDA) earnings were positive, and the stock rose. That was a relief to the market. Also, Fed Chair Warsh made the Keynote Address at the Jackson Hole Monetary conference this morning. The market's reaction is muted.
Yesterday, I joined the team at tastylive for a conversation about the current market, some of the strategies I’m trading today, and how my approach to options has evolved over the years.
McMillan has joined INVST — and the research, advisories, data, and market analysis you rely on will continue.
We recently announced an important new chapter in McMillan’s history: INVST has acquired McMillan. For our longtime subscribers, customers, and readers, we want to start with the most important point:
We have been cautioning about a potential increase in implied volatility ($VIX) for some time. However, $VIX has essentially refused to move higher. In fact, it’s in a distinct downtrend ever since $SPX began the latest rally from about the 7300 level. We are not alone in our opinion, which is perhaps one reason why volatility has remained low: “everyone” is all set with long $VIX calls or long $SPX puts, waiting for the volatility explosion, and the majority is often wrong.
A little more than a week ago, the FOMC meeting concluded (on July 29th), and traders were not happy. They sold the market before and after the meeting, closing $SPX that day at 7316. But then a series of events both real and psychological took place that released a buying panic.
The market has been frustrating to many over the past two months since new all-time highs were made in early June. Bulls expected another attempt at new highs by now, while bears expected a larger correction (given the uncertainties of Iran, interest rates, etc.). But the fact is, $SPX has remained in a trading range over that time.
It is once again time to consider that $VIX may have bottomed for the year. It is a common occurrence for $VIX to make its annual lows in July and then begin to rise in August. Sometimes that rise is stupendous, as it was two years ago. Most of the time the annual peak for $VIX is reached in October, which is when the market often sells into a strong bottom. We can compose a seasonal chart of $VIX. Chart 1 encompasses the years 1989 through 2025 (the most recent full year of trading). While there is $VIX data for earlier years, including 1987 and even 1988 distorts things too much. The data in Chart 1 uses the “current $VIX at the time” – regardless of how it was calculated.[1]
Buying the dip has been working on an intraday basis recently, but the larger picture is that there are dips to buy almost every day. That means that $SPX is not making much progress. Despite breaking out on the upside from the triangle formation that had existed, it has run into resistance at 7580 and has failed to challenge the all-time highs at 7600-7620. This keeps the $SPX chart from being upgraded to "bullish." Rather, it is range-bound at best.
Volatility products like VXX remain among the most misunderstood trading vehicles, and many of the misconceptions that existed when this article was first published still persist today. Although the piece below dates back to 2010, the underlying mechanics of futures rolls, contango, backwardation, and the performance drag built into volatility ETPs are just as relevant for today's traders. If you've ever wondered why VXX can behave so differently from the VIX itself, this classic explanation from 2010 is well worth revisiting.
