What a difference from April. Four weeks ago, we were writing here about a Death Cross, OVX at 90, and a fragile ceasefire with Iran. Today, the S&P 500 is trading near its all-time high, the VIX is well below 20, and volatility is sending clear bullish signals. What has changed, why we consider the situation highly bullish despite high valuations, and which option writing strategies actually make sense right now.
S&P 500 – All-Time High Reached
In mid-May, the S&P 500 reached a new all-time high of 7,517 points. The index is currently trading slightly below that, around 7,400, representing a moderate consolidation of about 1.5 percent from its peak. On a monthly basis, the S&P 500 is up approximately 4.6 percent, and over the last twelve months, it's up around 25 percent. The technical picture has fundamentally changed compared to April. The death cross from March has long since resolved, the index is clearly above its 50- and 200-day moving averages, and the 7,000 mark, which was considered a significant resistance in April, has been confirmed as support.
More exciting than the index itself is the sector rotation beneath it. Technology leads on a monthly basis with +9.4 percent, followed by Energy with +8.2 percent. On the losing side are the classically defensive sectors: Utilities with -5.5 percent, Basic Materials with -5.4 percent, Healthcare with -3.5 percent. Within the Tech sector, one segment stands out particularly: Software stocks. The IGV ETF, which we presented in April as an at-the-money (ATM) setup with a high premium, is now running at full steam again. Companies like Salesforce, ServiceNow, Adobe, and Workday have gained double digits in recent weeks. Anyone who can IGV-Trade from April has participated, is now sitting on a significantly increased ETF.
VIX Term Structure – Contango is Back
This is where it gets really exciting. The VIX spot is currently trading around 17 to 18 points, a significant drop from the 25 to 30 we saw during the Iran escalation. Even more interesting is the shape of the VIX futures term structure, which we're looking at vixcentral.com watched.
The curve rises cleanly from the May future at around 20.15: June 20.30, July 21.66, August 22.17, September 22.50, and so on up to December at 22.67. This is classic contango, in a form we didn't have weeks ago. At that time, the curve was partially inverted or flat due to the Iran crisis. Today it shows a healthy bull market profile with a pronounced steepness at the front end.
What does this mean? The market is currently not expecting a short-term volatility shock. The premiums between individual months are substantial, especially at the front end of the curve, where May to June increases by over 6 percent. For all those who trade products like VXX, this means: The roll yield is working strongly against long positions. Anyone currently buying VXX calls or bull call spreads for hedging is paying a premium with no realistic prospect of a loss, as long as volatility does not surprisingly spike upwards. However, as always, this effect can be used for the opposite direction: Bear call spreads on VXX remain an interesting setup in this constellation, albeit with a reduced position size, because the absolute volatility level is already low.
The bullish signal from Monday
One of the most exciting technical signals of the last few weeks formed on Monday of this week. The VIX fell by over 3 percent, even though the S&P 500 also closed lower. This is a classic bullish divergence and particularly significant because the VIX structurally tends to show slightly positive values on Mondays after the weekend. A bullish divergence near an all-time high is not a coincidence, but a clear indication that market internals continue to hold up and that market participants are buying less protection despite high index levels.
Oil and OVX – Reassurance with residual risk
The situation regarding oil has noticeably calmed down compared to April, although it is not yet completely stable. Brent is currently trading at around $108, significantly below the April high of $119, but still a bit above the long-term average. The OVX, the volatility index for crude oil, has retreated accordingly, but remains at an elevated level.
The Strait of Hormuz remains the Sword of Damocles hanging over the market. As long as the Iran issue is not definitively off the table, oil volatility will remain the single largest source of market stress. Currently, the market has come to terms with the status quo. Should the situation escalate again, we would first see it in the OVX and the VIX futures curve, which would then tip from contango into backwardation.
What does this mean for option writers?
Here comes the uncomfortable truth for everyone who has been selling cash-secured puts with fat premiums in recent months. This phase is over for now. With the VIX below 20 and stock prices near their all-time highs, options premiums have become thin, the vola-theta ratio is working unfavorably for deep OTM options, and the risk-reward ratio is significantly less attractive than it was just six weeks ago.
What this means in concrete terms: existing short put positions are consistently closed at 50 to 70 percent of the premium received, not held until expiration. We are currently opening new CSPs only very selectively, and when we do, it's closer to the money than usual. With low volatility, the option writer should be closer to the money, not further away. A Delta-30 or Delta-40 put on a solid stock has a significantly healthier ratio of premium to vega risk in this phase than a Delta-10 put on the same underlying. The reflex „with low volatility, I prefer to play it safe and take Delta-10" is one of the most common traps we observe in option writers. Mathematically, the opposite is true.
Instead of continuing to play the role of a seller of options aggressively, the current market phase is a phase for direct stock positions. Those who want to ride the bull market should buy stocks long and enjoy the rising prices. Those who want to retain option-selling power should make room in their portfolio by gradually closing existing short positions. This space will become valuable once volatility picks up again. Then we will be free to sell puts again at a high volatility level, with significantly better premiums than today.
What we should focus on now
Three variables will determine the coming weeks.
First, the Fed. The next meeting on June 16-17 will be the first real assessment of the new Fed leadership after Powell's term ends as scheduled in mid-May. The market is currently not expecting further interest rate hikes this year. A surprisingly dovish message could further fuel the bull market, while a hawkish statement would quickly cause nervous movements.
Secondly, inflation. Headline inflation has risen to 3.8 percent, the highest value in almost three years. The main reason is energy prices, which remain supported by the Iran situation. As long as the Strait of Hormuz remains a risk factor, inflation will not return towards the 2 percent target. This further restricts monetary policy options.
Third, the VVIX. As long as the VVIX stays below 100 and the VIX futures curve is in clean contango, we remain bullishly positioned. Once the VVIX sustainably rises above 100 and institutional hedging activity becomes apparent, we would take our foot off the gas and consider hedging trades again, as we had set them up before the start of the Iran conflict. This space becomes valuable as soon as volatility picks up again. Then we are free to sell puts again at high volatility levels, with significantly better premiums than today.
Conclusion
The situation has fundamentally turned around compared to April. The bull market is back, volatility is at rock bottom, and many things suggest further stock price increases in the near future. However, one should not lose sight of inflation and interest rates, as disruptions could occur here in the coming months. But the VIX has to show us that before we react.
Until then, our line remains clear: bullish with direct investments in stocks, gradually closing cash-secured puts with profits, and keeping enough space in the portfolio to aggressively re-enter with option strategies during the next increase in volatility. The next phase of high premiums is sure to come. Until then, we'll let the bull carry us.
