There is a lot to distract attention from where the market is going in terms of the big picture. That's where a long term lightly labeled DJI chart comes in handy, especially one like this that is red lined for a major break that will maximize odds that a Wave 3 down is underway.
DJI Weekly
The Covid Crash low of 2020 is the minimum expectation for a third wave down from current levels. That is a long way down and it begs two questions, first, when does it occur and, second, what is the best trading vehicle for the drop?
When it starts should be obvious day 1, after all, it is a third wave down at multiple degrees of trend. It may also be helpful to consider when it will end, as seasonality and cycles (and even price patterns looking at the DJI's chart) are pointing to the fall of 2023 as containing a panic day (or two), the recognition day that also marks the beginning of the end, and ironically, when to look at select longs and calls.
As for what vehicle to best trade the decline, naturally, cheap options are the answer, meaning index and stock puts that are priced today without any obvious crash premium, as that will come from the waterfall decline and accrue to the benefit of those already well positioned for the inevitable. As you may have surmised by now, we will already be there.
The Long Volatility Play
Market indices all have cheap puts, but outstanding values can also be found in volatility calls, as VIX is setting up for a spike into the 50's or more with triple digits possible before the NFL's first regular season game.
VIX Weekly
This is our own long term VIX chart. Look closely, it triggers long 1-2 times a year and in 6 out of 7 of the past signals, since 2018, VIX has more than doubled from its lows just previous to the Buy Signals. The index topped out at price levels of 50, 36, 21, 85, 41, 39, and 35 respectively. Those levels represent doubles, triples, quadruples and more from the VIX lows just prior to the signals. The next Buy is likely to be generated in the weeks ahead and from levels in the low 20's. Minimum expectation is for a double from the recent low around 15.50, meaning a run into at least the 30's. However, we are due for an outlier, meaning a run up into at least the 40's or 50's should be factored into risk:reward calculations.
Panic Day Ahead
Timing is tricker, so we will be buying VIX calls in both the shorter and longer term timeframes, i.e., Jun and Sep, depending on how soon the Buy Signal is triggered. At current pricing, that means gains between 5X and 20X on a VIX spike to $40, and double those returns on a spike to $60. Anything higher, well, let's not jinx the trade by going there quite yet, just remember, "panic day" ahead.
VIX Sep Calls: Intriguing (or Suspicious) Volume & Open Interest
VIX Sep 20 $60C- $5 Million Bet
Note: That's a single $5 million bet on 5,000 VIX Sep 20 $60 calls - meaning VIX needs to be at or above $70 on Sep 20, 2023 for the trade to pay off. We caught the 5,000 calls' bet, but what about the other 315,000 of these $60 calls that have already been bought (see open interest above). Who knows what?
Best Bet for the Summer: A discounted introduction to what we do and how we do it.
