Today's July's Consumer Price Index (CPI) had a reading of 8.5% year over year ("YOY"). This is below the consensus of 8.7% YOY. Investors spurred a rally on hope that the Federal Reserve may slow its pace of interest-rate hikes. So we did see a firework today to the upside. Thank God, I took all the gains yesterday from the option trades of shorting SPY/SPX that were due either today or this week. Although I was expecting a firework of selling, my gut feeling told me it was wise to stay on the sideline in facing the uncertainty of the reaction.
Next week and forward it will be a different story. VIX call futures are 10 times more expensive than puts in one week from now, and the ratios are even higher in two weeks or further down the road. What it is telling us is that traders are expecting 10 times more likelihood of volatility with higher VIX than lower VIX, which is usually associated with market turmoil. I think the chance is quite high that we will see more fireworks in the weeks ahead but to the downside instead.
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