Should You Buy This Dip? Reading the Signals from Put-Call and the VIX
Should You Buy This Dip? Reading the Signals from Put-Call and the VIX
Should you buy this dip?
Up front: I'm not stepping in aggressively right now. But the put-call ratio is pointing toward a possible near-term bounce, so I'm watching and preparing to scale in rather than going all-in.
After a drop like Friday's, the most common question is whether to buy here. My honest answer is that I'm curious and watching closely, but this isn't the spot to bet the farm just yet.
What the put-call ratio is telling us
On Friday, June 5th, put volume exploded. That's a sign crowd sentiment turned very bearish.
I can't tell you what happens Monday. But I've watched this story play out so many times: Friday crashes lower, and then Monday you get the pop. It's the weekend sell-off effect. People don't want to hold into the weekend, so they sell Friday, then buy back their positions Monday.
Let me be clear about one thing, though. This doesn't necessarily mean we fly through the highs and keep going. Uncertainty in the Middle East and the postponement of SpaceX's path into the S&P 500 are adding jitters to the hyped IPO stories, which makes a one-way rally hard to count on.
Turning a VIX spike into a trade
The VIX jumped 40% on Friday. That's no joke. The question is whether you get follow-through. Last time it happened, you got the pop and then it completely cratered back down. It could be a bigger one this time, but I just don't see the catalyst for that kind of move right now.
So here's my plan:
- If the VIX keeps popping → I'll sell premium by writing cash-secured puts on names I like. The more the market falls and the more elevated the VIX stays, the more premium I get paid for the same action.
- If the Nasdaq and S&P fall further into their key retracement levels → those levels become very attractive places to get long.
The signal is still "close," not "now"
By the tools I use, the S&P and Nasdaq are scoring +3 and +4 respectively. That's not quite enough for me to look at a long setup, but we're getting close. If those scores keep improving, I may take some small stabs on the long side from a short-term trading perspective.
For now, I'd rather let the dust settle. My hands are busy with shorts on silver and longs on the dollar, so I'll mostly stick to managing those. But I'll keep an eye on the put-call ratio, because it does make me think some kind of bounce is possible.
FAQ
Q: Why does a Monday bounce often follow a Friday crash? A: It's the weekend sell-off effect. Traders don't want to carry risk over the weekend, so they trim positions Friday and buy them back Monday, which can produce a short-term bounce. That said, a bounce doesn't guarantee a full recovery to the highs.
Q: Why are cash-secured puts attractive when the VIX is high? A: Higher VIX means richer option premiums. By writing puts on names you like, you get paid more premium for the same action when the market is falling and volatility stays elevated.
Q: Is now the time to buy? A: By my tools, the S&P and Nasdaq score +3 and +4, which isn't yet a long signal. If those scores keep improving, or the indices fall into key retracement levels, that's where I'd consider scaling in.
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