Updates 11:09 AM ET - Wednesday 5/18/22
New bets on fear
As May VIX options expire this morning (VixEx), it appears that there is renewed fear on the part of traders. They are buying VIX calls, placing fresh bets on rising volatility.
These bets may override the bullish effect of expiring equity options (Friday OpEx).
We think the odds are high here that $VIX will retest at least 30, possibly rising as high as 35 if the fears persist. This means that $SPX $NDX IWM will most likely be testing the low price zones formed between 5/12-5/13.
For today, we are sticking with a Quick Bear trade via UVXY to capture this rise in $VIX. Keep in mind that this is a tough environment to trade in because VixEx and OpEx are producing opposite effects.
Updates 1:45 AM ET - Wednesday 5/18/22
Short-covering rally is likely to continue...but weak
The current rally is happening because of VixEx and OpEx. $VIX options are expiring today, while equity options are expiring this Friday. Equity options are mostly puts purchased for hedging. As these puts are unwound, dealers buy to cover their own shorts which were set up originally to protect their books. All this short-covering activity reduces volatility and boosts equity prices.
Going into this week, we were hoping for $VIX to retest at least 30 or higher before dropping down again towards 20. This would mean a retest of the lows for $SPX $NDX IWM. If successful, it would set the stage for a sustained rally all the way up to $SPX at 4300 or higher.
However, we haven't gotten this retest yet. And at this point, as we approach Friday, there's no reason for volatility to rise. Not while these bearish bets are getting unwound.
So we have to assume that the current short-covering rally will continue up, at least until Friday.
However, unlike March OpEx where there was a huge volume of puts, this put volume this time is not as high. So there may not be as much fuel to help push the rally past Friday.
And there are very few calls, and not a whole lot of demands for equity from non-options buyers. So we have our doubts about the longevity of this rally.
Finally, NQ $NDX are not rallying as strongly as ES $SPX are. We want to see the weakest sector have a super rally as proof of strong short covering activities.
Key levels for $SPX ES
Still, even if this rally isn't going to last that long, it is likely to last until Friday, or into early next week even.
Regardless of what you trade, keep an eye on ES and $SPX levels. For Wednesday, ES $SPX are likely to be traverse between 4040 and 4110. In order for this rally to continue, ES $SPX need to stay above 4040. If that support level is maintained, the short-covering activities can push ES $SPX all the way to 4110, and then 4155.
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The information presented here is our own personal opinion. Consider it as food for thought. We are not offering financial advice. We are not promoting any financial products. We are not registered financial advisers or licensed brokers. We make no guarantee that anything will unfold according to our projections. You are proceeding at your own risk if you follow our trades.