As we do every month, we'll look at the numbers here, not the headlines. And the numbers currently tell a surprisingly quiet story. The S&P 500 is trading near its all-time high, and volatility is at rock bottom. Anyone who has primarily followed the crisis news in recent weeks might be surprised that the market seems to know so little about it. This very discrepancy between the perceived situation and the actual risk is the most interesting part for us as option writers.
VIX and VVIX: The market is not pricing in worries
The VIX, The market's fear barometer is trading just below 19 today, putting us clearly below the psychologically important 20 mark. Remember: in early March, the VIX briefly spiked to 35 in the wake of the Iran crisis. Those who didn't let it throw them off track smoothly rode the subsequent normalization. None of that spike remains now.
Just as important to us is the second glance, which is directed at the VVIX. The VVIX measures the expected fluctuation of the VIX itself, meaning the volatility of volatility, so to speak. It has come back from its highs of over 140 in March to currently around 95 and is holding there. This is a low level. In plain terms: institutional hedgers are not buying expensive VIX calls, and nobody is currently positioning themselves for a volatility jump. There is no underlying tension that the VIX is still concealing on the surface.
This results in the same picture as in previous weeks: VIX low, VVIX low, no divergence between the two. Overall, this is bullish for the stock market, each signal on its own, and even more so in combination.
The summer timetable
We are therefore sticking to our schedule. We think in three phases, and we know at all times which one we are in.
Phase 1, the current situation. VIX and VVIX are low, the market is near an all-time high. Everything is bullish. We will remain long in indices and individual stocks here and collect premiums. Important: focus on individual stocks, not the index. The index premiums at this volatility level are simply too thin to justify the remaining risk. Anyone selling out-of-the-money index puts here is getting paid very little for a lot of risk.
Phase 2, the first divergence. On the surface, things remain calm, but beneath the surface, volatility begins to paint a different picture. The classic example is the VVIX picking up while the VIX is still sleeping. This phase typically lasts for days to weeks, so there's no need to rush. We use it to tidy up the portfolio and consciously reduce risk. Short puts are a no-go during this time; instead, we add hedges to the portfolio.
Phase 3, the movement. The market is falling, and volatility continues to rise. Now it's getting operational, because the best option holder opportunities of the year arise at the volatility peak. When that happens cannot be forced. However, seasonality provides a signal: Historically, volatility typically rises towards the end of July. So, the summer usually begins quietly and ends more restlessly. We don't trade on a calendar, but whoever knows in which weeks the market historically turns will look closer at the right time.
In short: We are waiting and seeing. We will only build up a long position or hedge when we see clear signals or divergences. This patience has saved us from losing money on positions opened too early in recent weeks.
Sugar: A commodity that becomes interesting through COT data
So while the stock market is mostly about waiting, it's worth looking to the side this month, towards the sugar market. Sugar No. 11 (TWS symbol: SB) is currently trading at around 13.4 US cents per pound and thus close to its multi-year lows. That alone is not a reason to go long; cheap can always get cheaper.
It only gets interesting in conjunction with the COT data. Commitments of Traders reports show how major market participants are positioned, and it's precisely here that we're seeing early signs for sugar that speak to the long side. The positioning of commercial traders, meaning those who know the market best, has moved out of their extreme. Such constellations have often preceded bottoms in the past.
Added to this is a second building block: the term structure. Sugar futures are trading in a clean contango, meaning later contracts are more expensive than nearby ones. An upward-sloping curve for a commodity near its lows is a constructive picture that supports the long-side thesis.
We don't see this as a done deal or a finished signal, but rather an indicator that puts sugar on our watchlist. For us as option writers, a deeply undervalued commodity with supportive COT data and an intact term structure is primarily a candidate for the long side through sold puts. We will detail how we concretely implement something like this, including strike, maturity, and cash flow calculation, for the readers of Options Briefs before.
Conclusion
The stock market remains in calm waters as long as the VIX and VVIX do not diverge. We remain long individual stocks but are not chasing thin index premiums and are keeping our powder dry for the choppier weeks that seasonality suggests from the end of July. Outside of equities, it's the sugar market that is getting our attention this month via the COT data.
We continuously keep the complete timetable with scenario plans and the stock market traffic light up to date. For those who want to delve deeper into the interplay of VIX, VVIX, and the futures curve, we offer free live webinar with CapTrader correctly.
