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