By Jeff Clark – the editor of the Delta Report Newsletter
The stock market’s crystal ball is flashing another warning sign.
Longtime readers know I often refer to Volatility Index (VIX) option prices as the “crystal ball” of the stock market. They do have unique predictive abilities – which I explained in early July, when we looked at VIX options.
VIX call options are, once again, far more expensive than the corresponding put options. That means traders are willing to pay much more to speculate that the VIX will be higher one month from now than lower.
And, a higher VIX usually means a lower stock market.
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The last time we saw a similar setup was about one month ago.
Back then, the S&P 500 had just made a new all-time high above 3020. And, the Volatility Index had fallen from a high of over 24 in early August to about 14. But, the VIX option prices were telling us the trends were about to reverse.
VIX call options were priced at roughly five times the value of the put options. Whenever we’ve seen that condition in the past, it usually leads to a rally in the VIX and a decline in the broad stock market.
Sure enough, just over two weeks later, the S&P 500 was trading 130 points lower and the VIX had popped above 20.
Chalk up another “win” for the stock market’s crystal ball.
Now we’re seeing a similar setup…
The S&P 500 closed yesterday at 2990. It’s up about 100 points over the past week or so. Meanwhile, the Volatility Index has fallen from above 20 earlier this month to less than 14 yesterday.
Once again, though, the VIX options are warning of a reversal.
For example, just compare the VIX November 20, $14 calls to the VIX November 20, $14 puts. The calls were offered yesterday at $3.25, while the puts were offered at $0.40. This was when the VIX was trading at 13.94.
In other words, even though the VIX puts are $0.06 in the money (meaning they have intrinsic value), and the VIX calls are $0.06 out of the money, the call options are trading for more than eight times the price of the put options.
VIX option traders clearly expect the index to move higher over the next several days, and even higher still over the next month. And a rising VIX (rising volatility) usually accompanies a falling stock market.
So, if you want to know where the stock market goes from here, then pay attention to VIX option prices. Right now, the crystal ball says the market’s next big move is most likely lower.
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