Another day, another extreme.
The VIX put/call ratio dropped to 0.1 yesterday, which means that there are 10x more call options traded than put options.
The 10-day SMA of the VIX put/call ratio fell to 0.273, the lowest reading since July 21, 2008.
A contrarians initial impulse (most sentiment indicators carry a contrarian message) would be to expect even lower VIX readings.
However, a look at similar historic setups suggests that the ‘herd’ (call buyers) may actually end up being right.
The chart below plots the VIX against the VIX put/call ratio. The S&P 500 is also included for additional insight.
The red lines highlight similar extremes.
A similar put/call ratio extreme in January led to a 50% VIX spike. Most other occurrences were followed by a VIX rally within the next couple of weeks. VIX ETPs like the iPath S&P 500 VIX ETN (VXX) and UltraVIX Short-term VIX ProShares (UVXY) benefited from the VIX spike.
The only outlier is the March 2007 extreme, which was followed by a declining VIX and rising S&P 500 (SPY).
The VIX’s descent towards its 88-month low (thus far at 10.34) harmonizes with VIX seasonality. Back on March 21, when traders started looking for a VIX low, the Profit Radar Report published a VIX seasonality chart and stated that: “VIX seasonality is not yet supportive of higher readings.”
VIX seasonality has not yet bottomed, but it’s getting close, enhancing the meaning of the low put/call ratio.
This article includes a link to the only free and updated VIX seasonality chart on the web and answers the question if it’s finally time to buy the VIX:
Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.
Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.
More From iSPYETF
- Why 2014's Biggest Gold Rally May be Bearish for S&P 500
- Equity Put/Call Ratio at 41-Month Low, but Risk of 'Black Swan' Event Limited
- Updated 2014 S&P 500 Forecast