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VIX May Have Finally Found Its Floor, Macro Risk Advisors Say

Volatility can’t stay this low forever -- or so investors have been saying for what feels like forever. They may have finally found their moment.

As the market rallies, “volatility isn’t that low anymore,” Pravit Chintawongvanich of Macro Risk Advisors said in a report Tuesday, adding that the Cboe Volatility Index (VIX) curve is flattening. The VIX rose as much as 22 percent on Tuesday to as high as 12.41, the highest level in six weeks. That is still around 30 percent below the average of 18.1 since the bull market started in 2009.

The correlation of S&P 500 Index stocks to each other has been increasing as the market rallies, the reverse of what’s typically seen, and this gain over the past two months points to broad buying of equities –- a “‘melt up’ so to speak,” Chintawongvanich wrote.

As an example, the report highlights S&P 500 January 2,750 call options, which went from 60 cents on Jan. 2 to $39 on Friday.

“The incredibly outsized return for this SPX call option is a perfect illustration for how underpriced the ‘right tail risk’ has been,” Chintawongvanich said. “Volatility may have found the long-awaited floor.”

The report recommends trades to consider:

  • iPath S&P 500 VIX Short-Term Futures ETN (VXX) March 22/20 1x2 put spread for 40c
  • SPDR S&P 500 ETF Trust (SPY) Feb. 286/287 call spread for 12c
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