Knowing The Direction

If you are an option trader, you will need to assume the position of (i) bullish; (ii) bearish or (iii) neutral. Once you have established the position / direction, you will tailor the strategies based on the assumed position or direction.

How do you determine the position or direction?

  1. Fundamental
  2. Technical
  3. Gut feel
  4. VIX
  5. Put-Call Ratio

Let’s look at point 4 & 5.

VIX vs SPY

Typically, if VIX rises, SPX tends to be bearish. If VIX drops, SPX tends to be neutral / bullish.

SPY vs VIX

VIX peaked on 16 March, which preceded the bottoming of SPY. Continuing decline in VIX supports the uptrend of SPY. Since overall market volatility has dropped, it has two impacts (other than implication on direction):

(i) Option sellers benefit from decline in volatility

(ii) To consider being option buyers since volatility is bottoming (cheaper to be buyer buyers)

Put-Call Ratio vs SPY

If Put-Call ratio rises, SPY tends to decline and vice versa. Currently, we are seeing a downtrend in the Put-Call ratio, which in turns supports SPY’s uptrend.

Put-Call Ratio

This post is not an investment advice or endorsement. Kindly refer to general disclaimer of the blog.

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