Stocks are bathed in red ink today, with the Dow plunging the most since the June 27 post-"Brexit" bloodbath and the broader S&P 500 Index (SPX) on track to snap its noteworthy stretch of low-volume sessions. As stocks sell off, volatility is surging, with the CBOE Volatility Index (VIX) set to settle north of the critical 14.07 mark. Echoing the sharp move higher in the market's "fear gauge" is the price action in the iPath S&P 500 Short-Term Futures ETN (VXX), last seen up 10.2% at 36.92. What's more, VXX options volume is soaring, trading at three times what's typically seen at this point in the day.

By the numbers, around 171,000 VXX call options are on the tape, compared to roughly 122,000 put options. The majority of options traders are of the eleventh-hour variety, with the weekly 9/9 series accounting for nine of VXX's 10 most active contracts.

Seeing the most attention is the weekly 9/9 37-strike call, where nearly 10,400 contracts have traded. It looks like one speculator may have combined these calls with the weekly 9/9 36.50-strike calls to initiate a long call spread. If this is the case, the goal is for VXX to be sitting at 37.00 at tonight's close -- when the weekly series expires -- allowing the trader to pocket the maximum potential profit of $0.33 per pair of contracts (difference between the two strikes minus $0.17 net debit).

Elsewhere, the weekly 9/9 34-strike put has garnered notable attention. It appears as if new positions are being purchased here, as options traders brace for an end-of-session retreat for the volatility gauge. Regardless of where the iPath S&P 500 Short-Term Futures ETN (VXX) settles tonight, though, the most the put buyers stand to lose is the initial premium paid.

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Stocks have been on a roller-coaster ride in recent sessions, with rate-hike chatter from several Fed officials helping the S&P 500 Index (SPX) snap its longest quiet period in years. Today, the action is to the downside, sending the ProShares Trust Ultra VIX Short-Term Futures ETF (UVXY) soaring 30% to 25.19 -- and options bears scrambling to bet on the exchange-traded fund's (ETF) near-term trajectory.

Taking a quick step back, bearish bets on volatility are not unusual these days. In fact, according to the latest Commitment of Traders (COT) report, large CBOE Volatility Index (VIX) traders currently have the largest short position on VIX futures on record. Plus, total large VIX speculator positions are also at an all-time high.

Against this backdrop -- and with UVXY stuck on the short-sale restricted list following Monday's huge move higher for the broader stock market -- put volume on the ETF has swelled to three times what's typically seen at this point in the day. In fact, with roughly 100,000 UVXY puts on the tape, put volume is in the 99th percentile of its annual range.

Most active is UVXY's September 20 put, where more than 10,400 contracts have traded. It looks as if new positions are being purchased, suggesting put buyers are anticipating a quick retreat south of the round 20 mark by this Friday's close, when front-month options expire.

More broadly speaking, options traders across the major exchanges have shown a preference for long calls over puts in recent weeks -- perhaps to hedge short VIX positions or to guard against a volatility pop. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), 1.35 UVXY calls have been bought for each put over the past 20 sessions.

Echoing this is the ETF's Schaeffer's put/call open interest ratio (SOIR) of 0.49. Not only does this show that calls more than double puts among options expiring in three months or less, but it ranks lower than 90% of all comparable readings taken in the past year. Simply stated, short-term options traders are more call-heavy than usual toward ProShares Trust Ultra VIX Short-Term Futures ETF (UVXY).

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With the broad-market S&P 500 Index (SPX) up a solid if unspectacular 5% year-to-date, and a relatively upbeat start to earnings season, you might assume traders are generally feeling pretty good about stocks. But you'd be wrong. Based on several indicators we're seeing on the SPDR S&P 500 ETF Trust (SPY), CBOE Volatility Index (VIX), and elsewhere, there is a lot of unease among investors ahead of the U.S. presidential election, a November OPEC meeting, and the Fed's December meeting. Here are three charts indicating traders haven't been this nervous since the Brexit.

We'll start with the all-exchange, equity-only 21-day put/call volume ratio. According to Schaeffer's Quantitative Analyst Chris Prybal, this ratio recently rose to 0.94, suggesting a growing appetite for bearish bets over bullish. In fact, current levels are the highest they've been since the June Brexit vote. What's more, Prybal observes that over the past 20 sessions, buy-to-open (BTO) activity has risen 10% on puts while declining 13% on calls.

This demand for puts over calls is reflected in options pricing, too. On the SPY, specifically, put options are still priced about 100% higher than calls after hitting a 2016 extreme in June, based on the 10-day moving average of the 5% out-of-the-money put/call skew. This echoes a recent observation we made on SPX options pricing.

Meanwhile, on the VIX, the 20-day BTO call/put volume ratio is fresh off a year-to-date high, hinting at mounting volatility expectations. Though, based on the chart below, the ratio has climbed much higher during various periods dating back to January 2013:

Several sentiment surveys we track also reinforce a general skittishness among traders. In the most recent Investors Intelligence (II) survey, the bulls-minus-bears line dropped below 20% for the first time since late June -- again, right after the aforementioned Brexit vote. The line was recently near an annual high.

Finally, according to a survey of 213 fund managers by BofA-Merrill Lynch (BAML), global investors have upped their cash holdings to 5.8%, back to their post-Brexit highs. This came at the expense of bond allocations, which fell to 10-month lows. Moreover, the BAML survey said the top two risks among investors are potential eurozone disintegration stemming from Brexit (cited by 20% of those surveyed), and the potential of a Donald Trump presidency (17%).

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Last week, we highlighted three signs of mounting fear in the stock market ahead of the U.S. presidential election. Well, since we ran that article, hints of building pre-election jitters haven't slowed down, based on trading trends on the CBOE Volatility Index (VIX) and S&P 500 Index (SPX).

According to Trade-Alert, VIX calls outnumber puts by a roughly 3.2-to-1 margin -- the loftiest ratio since late April -- signaling heightened expectations of greater volatility ahead. Of late, most of this action has been centered on the November series of options, which have accounted for 68% of trading volume over the past five sessions, per Reuters. In other words, traders may be hedging ahead of election day uncertainty.

Also of note, VIX's 20-day buy-to-open call/put ratio stands at a top-heavy 4.77. This is the highest ratio since Dec. 8 -- the week before the Federal Reserve raised interest rates for the first time in almost a decade -- as you can see on the chart below:

Signs of fear can be detected on the SPX, too, as alluded to above. Specifically, total short interest among these stocks is higher now than it was before the Brexit vote in late June:

Last but not least, the front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) on the SPDR S&P 500 ETF Trust (SPY), PowerShares QQQ Trust (QQQ), and iShares Russell 2000 Index (IWM) is up to 2.71. In other words, near-the-money put options in the November series nearly triple calls. This is the highest ratio in roughly six months, and nearly doubles the average front-month gamma-weighted SOIR of 1.46.

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Stocks have been getting smacked recently, as anxiety grows ahead of next Tuesday's U.S. presidential election. In fact, with the Dow turning lower at midday, the large-cap index is on track to notch its sixth straight day of losses. Additionally, the S&P 500 Index (SPX) and Nasdaq Composite (COMP) are on pace to extend their daily losing streaks to eight -- which would mark the longest such streak for the S&P since 2008. As the pre-election uncertainty swells, so has the CBOE Volatility Index (VIX), with the market's "fear gauge" taking aim at a notable run of its own.

Specifically, VIX was last seen up 9.7% at 21.20. A win today would make it eight in a row for the fear gauge -- matching the record daily winning streaks seen in April 2012 and December 2013. This streak has seen the biggest gains of the three, though, with VIX up 62.8% since its Oct. 24 close at 13.02, versus a gain of 31.8% in 2012 and 23% in 2013. If history is any guide, VIX could be on track to leave this winning streak at eight -- and potentially stage a notable decline through mid-month. Although the sample size is small, the VIX averaged a loss of 5.2% in the session following its previous runs, which widens to an 8.7% decline going out two weeks.

Meanwhile, the S&P 500 Index could be on track to snap its losing streak, based on VIX's string of wins. Again looking at the small sample size of VIX's two prior eight-day winning streaks, the SPX has been positive both times in the subsequent session, averaging a gain of 0.9%. The broad-market benchmark's performances are mixed in the one-week and one-month time frames, while the two-week return averages a gain of 1.2%.

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It's been a rough week for stocks -- both stateside and overseas -- as anxiety builds around the outcome of Tuesday's U.S. presidential race. In fact, the Dow is currently down 1% week-to-date, while the S&P 500 Index (SPX) and Nasdaq Composite (COMP) are flirting with week-to-date losses of 1.3% and 2.2%, respectively. As stocks sell off -- and investors around the globe rush to the safety of cash at the quickest weekly pace since 2013 -- the CBOE Volatility Index (VIX) just matched its longest daily win streak to date. And while the market's "fear gauge" was last seen down 2.5% at 22.52, it's still up 33% week-to-date, and lingering near its highest perch since the Brexit-inspired market mayhem on June 27.

Speaking of streaks, both the S&P 500 and the COMP closed lower for an eighth straight day on Thursday, with the former marking its longest losing streak since 2008! At last check, the SPX and the Nasdaq had erased earlier losses following this morning's jobs report, which showed a solid rise in wage growth last month. Should either index fail to snap its losing streak, though, it would mark the longest stretch of daily losses for the SPX and COMP since December 1980 and May 1984, respectively.

Meanwhile, it appears options traders are hoping this fear will translate into a flight to safe-haven assets -- gold, in particular. In the past 10 sessions, speculative players have initiated nearly 93,500 contracts at Market Vectors Gold Miners ETF's (GDX) November 28 call, the most of any other option. What's more, this out-of-the-money call is now home to the top open interest position on GDX, with 106,455 contracts outstanding.

Elsewhere, CNN's Fear & Greed Index has flipped to an "Extreme Fear" level at 16. While this metric stood at a more "neutral" 49 one month ago, all but one of its seven indicators is indicating "extreme fear," with junk bond demand the outlier.

One other sentiment indicator pointing to a rising fear is the latest Investors Intelligence (II) poll. Specifically, the percentage of bullish advisors fell 5.4 percentage points to 41.7% last week, compared to a 1.2% rise in bearish advisors, to 24.3%. What's more, the bulls-minus-bears line is now at 17.4% -- its lowest point since May 24.

Lastly, the National Association of Active Investment Managers (NAAIM) sentiment exposure  index fell 8 points this week to 58.08 -- the lowest reading since May 11. For context, the record-high NAAIM reading of 104.3 occurred on Jan. 30, 2013, while the all-time low of negative 3.6 was hit on Oct. 5, 2011. The average NAAIM reading since its inception is 59.3.

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In the wake of the presidential election, as the S&P 500 Index (SPX) and its index peers soared to record highs, the CBOE Volatility Index (VIX) -- or the market's "fear barometer" -- naturally plummeted from post-Brexit peaks. What's more, amid the skyrocketing optimism, put buying on the VIX surged to a pace not seen since September 2015, according to Schaeffer's Quantitative Analyst Chris Prybal.

 
As a result, the 20-day buy-to-open call/put volume ratio for the VIX has taken a nosedive. After hitting an annual high of 5.57 on Oct. 31, the ratio plunged 71% in a 21-day span -- the sharpest drop since December 2014, around the last time stocks were this overbought. This ratio is now back in the post-Brexit neighborhood from early July.
 

 

In the past 10 days, VIX December options (expiring Wednesday, Dec. 21) account for the top 11 most active. The 12- and 13.50-strike puts have seen notable builds of roughly 153,500 and 144,000 contracts, respectively, indicating buyers are expecting more downside for the VIX in the next few weeks. Nevertheless, VIX front-month calls still dominate, with the deep out-of-the-money 21 strike home to peak open interest of nearly 274,000 calls. The 20-, 22-, and 25-strike calls are also popular, with more than 200,000 contracts outstanding apiece.

On the charts, the CBOE Volatility Index (VIX) went on a historic winning streak ahead of the election, but ultimately stopped short of its post-Brexit highs. Specifically, the VIX stalled around $23 during its last surge, which is roughly double its August 2015 lows. In fact, while the VIX has embarked on a series of lower highs since the fourth quarter of 2015, the $11-$13 region has provided solid footing, and the "fear gauge" hasn't been in single-digit territory since before the financial crisis. What's more, the VIX has essentially followed its election-time pattern, ending up back in the $12 area, as predicted. 

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Greetings! I haven't chimed in for a while, but you have all done a great job keeping the CBOE Volatility Index (VIX) in check in my writing absence. But with an imminent cosmic Trump sea change on the horizon, we all have questions. Such as this:

"Since the guy's a bit of a wildcard, can we expect to see a steady volatility ramp (or endless spikes)? Or does the likelihood of a 3 a.m. Twitter rant against Pyongyang just get priced in during one big fell swoop, and it's smooth sailing from there?"

Short answer is yes, I expect volatility to lift. But I don't necessarily think it will happen because of President Trump, per se. Or, a better way to say that is: I would expect a rising volatility trend in the next four years, Trump or not. He may (OK; he will) exacerbate that, but given we have no control universe where he's not president, it will prove difficult to measure.

It's rough to see much into the VIX's future. We are all generally guided by the recent past. In fact, the single best way to "guess" at the market's volatility assumptions going forward is to look at the current realized volatility backdrop... and then add a few points, because the market net-net almost always expects higher volatility tomorrow than it sees today. Don't believe me? Watch financial TV for a day, and jot down any time someone gets asked what they see for volatility going forward. Dollars to doughnuts, they expect it to go higher.

Don't have the patience to watch much financial TV? I don't blame you. Good thing there's an objective way to gauge future volatility expectations. Just look at VIX futures! Here's the current VIX term structure, courtesy of VIX Central.

Volatility is definitely going to lift! VIX futures are all-knowing, and they see upticks as far as the eye can see. But alas, as we just noted, the market always expects higher vol out in time. And that's especially true at low VIX levels.

Here's Jan. 6, right after the monthly jobs report came out, versus two other moments in time with similarly low VIX levels. One is in August 2016, with the election season about to heat up. The other is in August 2015, with virtually no political volatility attached (because, as we all knew, the Trump Show would go away soon and Jeb and Rubio would fight it out for the nomination).

Our current curve sits between the older two, which makes some sense. The best analysis is that the market prices in some "Trump Vol Premium," but nothing all that noteworthy.

And remember, volatility futures are almost always wrong. They have predicted about 1,000 of the last 10 volatility spikes. They also only predict lasting VIX trends. Short-term VIX pops can and do occur somewhat often; maybe two to four times, in a typical year. A VIX future technically doesn't hedge you against that, unless you time the VIX pop almost perfectly (e.g., owning September VIX futures won't do you much good if it pops in April).

What's more, VIX futures won't help much in a very short-term, Trump tweetstorm-related vol pop. So I'm going to throw all of this out, and lay out my volatility expectations for the next four (gasp) years.

The uncharted waters we now face will likely produce more frequent VIX pops than we are accustomed to seeing. But that may have happened anyway. That's because, in the long-term picture, we are quite overdue for a more lasting VIX pop, Trump or not. Here's VIX back to 1993, using the 30-day moving average in order to smooth out the fluctuations a bit.

We tend to move in volatility "regimes" of four to six years. We started in a bit of a low regime, which begat a high regime in the late '90s and early '00s. That switched, in 2003 or so, into about four years of low VIX, then about three years of high VIX.

Long story short, we're now about six to seven years into a low VIX regime.

This is all very inexact, of course. Looking back with the benefit of time, perhaps the high VIX regime that started in 2007 really lasted into 2012. That means we're "only" five years into low VIX... which still suggests a lasting volatility storm will come soon.

So, I'm going to make some general predictions here.

The median VIX, over the course of forever, is 17.91. In 2016, the median was 14.31 -- similar to the sub-normal levels of the last few years. I predict that number moves higher in 2017, and trends higher still over the next few years.

I will not predict how often VIX makes short-term spikes, or remotely when they occur. They take us by surprise, almost by definition. But I do expect we see them more frequently going forward.

We tend to correlate all market moves to something news-related. And since Trump will remain in the news, said spikes may correlate to things he does, or says, or tweets. But it's likely more a byproduct of a rising volatility tide that would have happened anyway.

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.

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CBOE Volatility Index (VIX) call options have been flying off the shelves, leading to speculation that investors are bracing for a massive stock sell-off, as these vehicles are commonly used to hedge long equity positions. According to Trade-Alert, Friday marked the fourth straight day of noteworthy action in out-of-the-money (OOTM) VIX calls, with traders homing in on the deep OOTM February 21 strike -- which expires on Wednesday, Feb. 15.

The expiration date is notable, as it follows a pair of highly anticipated events, either of which could spark a surge in volatility. For one, President-elect Donald Trump's inauguration is scheduled for this Friday; for another, the Fed's two-day policy meeting kicks off on Tuesday, Jan. 31. Although a rate hike is considered unlikely, Wall Street will be scouring the central bank's post-meeting announcement for hints of a potential interest rate hike in March, which could trigger a spike in the VIX.

Other factors are likely fueling the rush for calls, too, according to Schaeffer's Senior V.P. of Research Todd Salamone. "With February VIX futures recently hitting their lowest level since mid-December, volatility speculators and those using VIX options as portfolio insurance may see this as an opportune time to bet for or hedge against a pop in volatility," Salamone explains. "Earnings reporting season is about to get into high gear, the inauguration is scheduled for the end of this week, 'Brexit' headlines are returning, and another Federal Open Market Committee (FOMC) meeting between January VIX expiration and February VIX expiration is on the calendar, which may be enough to make VIX call options attractive."

Speaking more broadly about the bias toward calls on the market's "fear gauge," the VIX sports a top-heavy 20-day call/put volume ratio of 4.19 at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Moreover, last Thursday, this reading clocked in even higher, at 4.78, its loftiest level since early November, per the chart below (courtesy of Schaeffer's Quantitative Analyst Chris Prybal):

It's more of the same today. With call open interest already docked in the 93rd annual percentile -- versus puts, which are in the middling 47th percentile -- calls are changing hands at twice the usual intraday rate. The deep OOTM February 17 call occupies the top position, while the third most active strike is the February 22 call. At last check, February VIX futures were 0.4 point lower at 14.20.

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The S&P 500 Index (SPX) performance immediately after a presidential election has been a pretty good indicator for how stocks perform in the six months after Inauguration Day, as Schaeffer's Senior Quantitative Analyst Rocky White pointed out earlier this week. However, if history is any indicator, the SPX and its fellow major market indexes could be at risk of a short-term speed bump -- and the market's "fear gauge" could jump -- after Trump swears in on Friday, Jan. 20. Below, we'll outline some historical stats on how the SPX and its peers tend to perform leading up to and after Inauguration Day, and list more than 40 stocks to watch before the inauguration. (And while you're at it, check out these 3 exchange-traded funds that could move as the Trump winds blow.)

The table below lists all the SPX stocks that have been positive every single pre-inauguration week going back to 2000. Medical supplier Hologic, Inc. (NASDAQ:HOLX) has been the best performer, averaging a return of more than 10.5%. In the past week, so far, HOLX is down 1.82%, but remains within striking distance of its annual high of $41.01, tagged in mid-December. Meanwhile, many consumer staples stocks ("Food Bevgs Soaps") tend to outperform leading up to inauguration.

That said, there are 15 SPX stocks that have never ended pre-inauguration week in the black. Bank stock Capital One Financial Corp. (NYSE:COF) has suffered the most, averaging a one-week drop of 7.42%. In the past week, COF has dropped about 2.1%. A few other banks/finance stocks also made the list, including Bank of New York Mellon Corp (NYSE:BK), which reported earnings this morning. Also notable, big-cap stocks Boeing Co (NYSE:BA), AT&T Inc. (NYSE:T), and Verizon Communications Inc. (NYSE:VZ) tend to perform poorly leading up to Jan. 20.
 

Going back to 1937 -- the first time Inauguration Day was on Jan. 20 -- the SPX has averaged a slimmer-than-usual return in the week before inauguration (which does not include the Inauguration Day return). The Dow Jones Industrial Average (DJIA), meanwhile, has averaged a loss of 0.18% in this week. Still, both indexes ended the week higher 65% of the time. 

The tech-rich Nasdaq Composite (COMP) tends to outperform leading up to Inauguration Day -- as it did yesterday -- averaging a gain of 1.18%, going back to 1972 (when we first have data), and positive 73% of the time. That's much bigger than the COMP's anytime one-week average return of 0.21%. The CBOE Volatility Index (VIX) tends to drop in the week leading up to inauguration, averaging a loss of 1.7% going back to 1993 (when we first have data), and positive only 33% of the time, indicating lower-than-usual volatility expectations. 

The week after a presidential inauguration (which does include Inauguration Day returns), however, all three major indexes tend to underperform, averaging a modest loss, compared to average anytime one-week gain. The Dow has been positive just 45% of the time during the week after a president takes office. The VIX, meanwhile, averages a slimmer-than-usual gain of 0.63%, but has ended the week higher two-thirds of the time -- much more than usual. So, if history repeats itself, stocks may be in for a pullback -- and volatility expectations could rise -- after President-elect Trump takes office on Friday.

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Anyone looking for a cheap stock with cheap options may have a match in BlackBerry Ltd (NASDAQ:BBRY). The mobile device maker's 30-day at-the-money implied volatility of 30.1% -- which ranks in the low 5th percentile of its annual range -- is only 12.1 percentage points above its historical volatility. In other words, it's an opportune time to purchase short-term BBRY options.

Among buyers, there's been a strong preference toward calls over puts. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have purchased 16.27 calls for every put in the last two weeks. The corresponding call/put volume ratio ranks only 13 percentage points from a 52-week high.

Echoing this bias toward calls is BBRY's Schaeffer's put/call open interest ratio (SOIR). At just 0.14, the stock's current SOIR is the lowest reading of its kind in the past 12 months. In other words, short-term traders are extremely call-skewed at the moment, hinting at bullish expectations for the shares. However, with 9.4% of the stock's float sold short -- which would take a week to cover, at average trading levels -- it's possible call buyers are, in fact, short sellers hedging their bearish positions.

Interestingly, it seems BlackBerry put traders have been expressing confidence, too. During the past two weeks at the major exchanges, speculators have sold to open 6,115 puts while buying to open just 702 -- resulting in a top-heavy sell-to-open ratio of 8.71. With volatility expectations so modest at the moment, though, it's a far better time to purchase premium than to sell it.

Technically speaking, BlackBerry Ltd (NASDAQ:BBRY) has mostly been spinning its wheels since August. Breakout attempts have repeatedly stalled in the $8-$8.40 range, while pullbacks have generally been contained by the $7 level. Perhaps this explains the put selling -- as traders may be more confident in a churn than an outright rally. At last check, the stock was 1.1% higher at $7.29.

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Stocks have resumed their record-setting run this week, with the release of several White House policy announcements seemingly breathing new life into the Trump rally. What's more, a round of well-received blue-chip earnings helped send the Dow soaring past the psychologically significant 20,000 mark. As such, the CBOE Volatility Index (VIX) -- or the market's "fear gauge" -- is hovering at its lowest levels since July 2014. Nevertheless, while put volume on VIX futures ran at an accelerated clip on Wednesday, 1.6 times the average intraday rate, the overriding trend in recent weeks has been toward long calls.

Per data from Schaeffer's Quantitative Analyst Chris Prybal, the VIX 20-day buy-to-open call/put volume ratio is moving higher -- with the ratio at 4.74, compared to its week-ago reading at 4.58. Likewise, the VIX 10-day buy-to-open call/put volume ratio has risen to 4.22 from 4.17 in the past week.

Drilling down, it's been deep out-of-the-money strikes in the February series -- which expires on Wednesday, Feb. 15, in the wake of the upcoming Fed meeting -- that have seen the biggest increases in open interest over the 10-session time frame. Specifically, the February 17 and 22 calls have seen the largest rises in open interest in the last two weeks, with a combined 495,085 positions added. These two strikes are now home to the second and third largest VIX open interest positions -- with the February 21 call in the top spot, with 394,488 contracts currently outstanding. Combine this accelerated call buying with an extreme short position on volatility futures by large speculators, and it seems many may be bracing for -- or hedging against -- a large volatility pop.

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