We previously held a Cboe Market Volatility Index (VIX) call option that expired on the 22nd of this month. This option acted as cheap insurance in case market volatility increased. It’s time to buy another cheap insurance policy just in case there is a volatility increase over the summer. 

You can see in the chart below two different volatility regimes. The first ranged between 20 and 30 while the Fed raised rates to fight inflation. Then there was a transition when the Fed switched into bank rescue mode in the spring of 2023. That lead to the Fed’s current policy of wait and see if their restrictive policy is going to tame inflation. This current regime has VIX locked in a range between 12 and 20.

If inflation is stubborn and the Fed decides to resume rate increases, it will be a good idea to have an insurance policy that profits if we return to the previous volatility regime.

This MDM graph compares the modeled expectations of current options prices (the orange line) to the actual movement of VIX over the past two years. You can see that the actual behavior (the blue histogram) made big moves up and down far more frequently than the modeled options prices expect. This tells us that VIX options are currently very cheap.

This Volatility Cone graph is showing us that volatility expectations (the yellow dots) are all below the average historical volatility over the last two years. To learn more about the Volatility Cone, click here. The expectations for the 4-month period going out to September are at the extreme low historical volatility. In fact, volatility expectations are at the lowest level since the COVID.

VIX options are very inexpensive right now. That could change if inflation data remains stubborn and the Fed decides to adopt a more restrictive policy. It is a good idea to purchase some cheap insurance just in case the market shifts back to the previous volatility regime.

Be sure to read the ODDS Online Daily Trade Idea report to get the details of our trade idea for an insurance policy using VIX options.

To access Odds Online Daily and be able to see any stock you are tracking in this software, click here.

Thank you,

Don Fishback