The stock market is soaring today, with the major U.S. benchmarks trading up at least 1% so far. Stocks are reacting to Sunday's first round of voting in the French presidential election, with centrist Emmanuel Macron and far-right candidate Marine Le Pen advancing to the May 7 run-off round. However, there were numerous signs that fear was growing in the lead up to yesterday's results, suggesting today's price action could be a relief rally.

Large Specs Increase Long Exposure to Gold

The latest Commitments of Traders (CoT) report shows large speculators have increased their net long positions on gold -- often seen as a "safe-haven asset." These positions are now perched at their highest level since the week of the U.S. presidential election last November. What's more, gold futures settled last week up 3% month-to-date. Today, however, June-dated gold futures have tumbled 1.2% to trade at $1,274.10 per ounce.

Optimism Among AAII Respondents Hits a Pre-Election Low

The most recent American Association of Investors Intelligence (AAII) survey showed 25.7% of its respondents chimed in last week with bullish expectations for the stock market over the six months. This is the lowest reading on bullish sentiment since Nov. 2. Conversely, the number of bearish and neutral respondents accounted for 74.3% of AAII members -- the highest reading since last November.

Options Traders Increase Bearish Exposure to European ETFs

Several exchange-traded funds (ETF) with exposure to the eurozone have seen an uptick in put activity recently. The Vanguard FTSE Europe ETF (VGK), which tracks major European markets, saw a 15,000-contract block of May 47 puts bought to open last Friday for $450,000 (number of contracts * $0.30 premium paid * 100 shares per contract). VGK had been stalling beneath $51 in recent weeks, but was last seen trading up 3.4% at $53.20, and was fresh off an annual high of $53.24.

Echoing this defensive stance taken by options traders, the SPDR Euro Stoxx 50 ETF (FEZ) and the iShares MSCI EAFE ETF (EFA) have put open interest docked near the top of their respective annual ranges. Put open interest on the iShares MSCI France ETF (EWQ), meanwhile, is at the top of its 52-week range, though the ETF just wrapped up its best trading day on a percentage basis since August 2012.

Long Put Options Gain in Popularity

Elsewhere, Schaeffer's Quantitative Analyst Chris Prybal noted that the 10-day equity-only put/call volume ratio is beginning to move higher, indicating long put options are growing in popularity. The ratio is currently docked at 0.97, which is the highest reading since Nov. 16.

VIX Options Volume Flashes a Signal Not Seen Since Before Brexit

The CBOE Volatility Index (VIX) saw a rush toward calls last week, after April VIX options expired. In fact, VIX call volume toppled 1 million contracts for two straight days -- something that hasn't happened since before last June's Brexit vote. VIX calls now outweigh puts by a more than 2-to-1 margin, with open interest docked 5 percentage points from a 52-week peak. With stocks surging today as the uncertainty of surrounding the French election temporarily subsides, VIX was last seen down 22.2% at 11.34 -- its lowest level since early April.

The results of the French presidential election over the weekend eased widespread fears of a future "Frexit," sparking a global relief rally for stocks. What's more, as traders once again whet their collective appetite for riskier assets, the CBOE Volatility Index (VIX) -- the stock market's "fear gauge" -- collapsed by 26% on Monday. According to data from Schaeffer's Quantitative Analyst Chris Prybal, this dramatic VIX drop represents a signal that's flashed just three other times in history. Below, we'll take a look at what that could mean for the VIX and stocks going forward.

Short-Term Volatility Pop Ahead?

Specifically, the VIX has dropped 25% or more in one trading day just four times, the last occurring on Aug. 9, 2011, nearly six years ago. The other two signals happened in May 2010 and June 2006. "The VIX historically finds support after such declines when going out a month," Prybal notes, "after volatility rolls over and plunges."

Specifically, the VIX has averaged a one-month (21-day) gain of 10.7% after these signals, and was higher 67% of the time. Going back to 2000, the VIX has averaged a much smaller one-month "anytime" gain of just 2.1%, higher 45% of the time. If past is prologue, the market's "fear barometer" could be due for a short-term volatility pop, perhaps amid some short-covering, as Schaeffer's Senior V.P. of Research Todd Salamone recently discussed.

Looking out two months (42 days) after a signal, however, the VIX tends to underperform. In fact, the VIX was higher 0% of the time at the three-, four-, six, and 12-month markers, and was down an average of 37.5% a year (252 days) after a signal. That's compared to an anytime one-year gain of 5.3%.

A Summer Pullback Could Be a Buying Opportunity

But what does this signal mean for stocks? The S&P 500 Index (SPX) has underperformed in the short term following these signals, averaging losses through the two month point, and higher just one-third of the time. Since 2000, the SPX has averaged modest anytime gains in this same time frame, with a batting average above 0.550 across the board.

"After this consolidation, however, SPX returns far exceed the at-anytime lookback period," Prybal notes. In fact, six (126 days) and 12 months after a signal, the S&P averaged gains of 11.1% and 19.2%, respectively, and was higher 100% of the time. Since 2000, the SPX has averaged anytime six- and 12-month gains of just 2.1% and 4.3%, higher 66% and 70% of the time, respectively. In other words, if history is any indicator, a short-term dip over the summer could spell a buying opportunity for stock traders.

As the S&P 500 Index (SPX) and Nasdaq Composite (COMP) dance with all-time highs, and with concerns about a right-wing French government -- and possibly a subsequent "Frexit" -- out of the way, the CBOE Volatility Index (VIX) is on pace to end below 10 for the first time since before the financial crisis. What's more, a single-digit close for the VIX -- also known as the stock market's "fear gauge" -- today would send up a signal seen just four other times ever, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

Specifically, this would be the fifth time ever that the VIX has closed below 10 after at least a month above that level. The last time this happened was in January 2007, which marked the second time in two months for a signal, which also flashed in November 2006. The only other signals went off in January 1994 and December 1993. (Editor's Note: This data previously excluded the 1993 signal, but has since been updated. We apologize for the inconvenience.)

We recently did a similar study of the SPX performance after a VIX close beneath 10.50, which has historically preceded weaker-than-usual returns for the stock index. VIX closes in single-digit territory have preceded even more lackluster stock market returns, though the sample size is very small.

After the four previous VIX signals, the S&P was down, on average, at the one-week and one-year markers. In fact, the SPX has averages a one-year loss of 2.18%, compared to an average anytime gain of 8.58% for the broad-market barometer, looking at data since 1993. And while the index was positive at the one-, three-, and six-month points, the average returns are much slimmer than usual. It's also worth noting that standard deviation is much smaller than usual after these signals, pointing to lower-than-normal volatility.

The VIX itself, on the other hand, has been higher at every one of the aforementioned post-signal benchmarks, looking at the "Percent Positive" columns below. The fear gauge averages much bigger-than-usual gains after these signals, more than doubling, on average, a year later. Of course, keep in mind that one year after the last signal -- in early 2008 -- the stock market wasn't faring so hot, with fear soaring in the face of the mortgage crisis.

The CBOE Volatility Index (VIX) is up 25.8% at 13.40 -- near its highest level since before the French election relief rally in late April -- as stock markets tumble on growing uncertainty surrounding President Donald Trump's legislative policies. However, considering May VIX options expire today, there was already an increased chance of a volatility spike, according to Schaeffer's Senior V.P. of Research Todd Salamone.

Specifically, in this week's Monday Morning Outlook, Salamone said that traders who have used "volatility short position will soon be unhedged. That means they're more apt to cover short volatility positions on negative news, or will be forced to replace volatility hedges, which puts a floor on volatility." In fact, since hitting a 10-year low of 9.56 on May 9, the VIX has jumped more than 37% -- with today's 20% spike on track to be the biggest since Sept. 9.

June VIX Options in Focus as May Contracts Expire

Against this backdrop, VIX options are crossing at two times what's typically seen at this point in the day, with 722,000 calls and 210,000 puts on the tape. Each of the index's 10 most active options reside in the standard June series -- which expires on Wednesday, June 21 -- with seven of those strikes calls. By far, the June 19 call has seen the most activity, with roughly 130,000 contracts traded.

VIX Options Buyers Target June 30 Calls as a Possible Fed Hedge

Heading into today's trading, peak open interest in the June series was found at the 30-strike call, with more than 304,000 contracts outstanding. Data from the Chicago Board Options Exchange (CBOE) confirms that the bulk of this activity has been of the buy-to-open kind, including a batch of 208,766 new positions that were purchased on May 9.

Given the deep out-of-the-money status of this VIX call option, it's likely that much of the action so far has been at the hands of traders looking to hedge their long stock positions against a volatility spike. Considering VIX options are based on the expected value at expiration, these speculators could be keeping a close eye on the mid-June Fed meeting, with Salamone recently noting that the "[Federal Open Market Committee] policy decision may be the most relevant headline impacting stocks."

The CBOE Volatility Index (VIX) hit 16.30 on May 18 - its highest intraday mark since Nov. 10, just after the U.S. presidential election. Last month's volatility spike was likely due to the combination of growing concerns over the Trump administration's ability to pass its legislative agenda, as well as the previous day's expiration of May VIX options. Despite this blip, though, it was the lowest average May VIX on record -- a signal that could bode well for stocks.

For the most part, VIX spent May south of the 11.25-11.50 region, which is half its pre-election high, and hit a 10-year intraday low of 9.56 on May 9. Underlining this period of low volatility is data from Schaeffer's Senior Quantitative Analyst Rocky White, which showed the VIX traded at 10.86, on average, last month -- the lowest average May VIX ever, taking out 1995's previous low-water mark of 12.27.

What's more, this is just the 11th time the average May VIX came in below 15 since 1990 -- a potentially bullish signal for stocks going forward. The near-term results are fairly lackluster, with the S&P 500 Index (SPX) averaging a post-signal loss of about 0.4% in the historically slow month of June, versus an average loss of 0.6% when May VIX is above 15.

Widening the scope highlights a more prominent post-signal outperformance. Specifically, in the June-through-August time frame, the S&P averaged a gain of 1.4% and was higher four-fifths of the time after a signal, compared to a loss of 2% and 41.2% win rate after a higher average May VIX. Likewise, the SPX has averaged a stronger-than-usual rest-of-year return of 5.11% after the average May VIX was below 15, and was higher 81.8% of the time. All time frames suggest a period of lower-than-typical volatility, per the Standard Deviation.

Lastly, White expanded the data for the market's "fear gauge" across all months. He found that the average May VIX for 2017 was second only to the November 2006 reading for the lowest on record. Below is a chart of the 25 lowest monthly VIX readings, with January, February, and March of this year also making the list.

Implied volatility (IV) refers to the expected movement of a security's price over a given time frame. IV is a crucial concept for options traders to understand, since it's a major component of an option's price. Higher IV results in higher option premiums, while low IV often translates into more affordable option prices.

Stock-specific events, such as management changes or earnings reports, can have a big impact on IV. If investors are expecting the stock to make a substantial move in one direction or the other in response to these known events, those expectations will push IV (and, by extension, option prices) higher. In the aftermath of the event, IV tends to decline rapidly as the market's reaction to the news is priced directly into the equity.

When IV spirals lower after an event, it's referred to as a "volatility crush," since options prices can drop so dramatically in such a short time frame. To ensure success in options trading -- and avoid the crush -- it's crucial to avoid buying extraneous volatility.

Before buying an option, it's possible to determine whether IV is relatively inflated by comparing it to the stock's historical volatility (HV). For example, a trader considering an option with one month (roughly 20 trading days) of shelf life would review the contract's IV level against the stock's 20-day HV. If IV is considerably higher than HV, it means expectations for future volatility are getting frothy. This type of situation is far from ideal for options buyers. When premiums are inflated, the upfront cost and total risk are that much steeper, and the stock must then stage an even greater move to surpass breakeven.

Whenever possible, premium buyers should be on the lookout for scenarios where IV appears to be underestimating the stock's ability to break out, as suggested by historical volatility. By keeping entry costs to a minimum, savvy traders can set their breakeven points as low as possible, and make the most of options trading leverage.

Ahead of May's monthly options expiration week, subscribers to our Expiration Week Countdown received a bonus trade that deviated from the parameters of our usual recommendations -- not only in that the underlying asset was a leveraged exchange-traded fund, but also in that the trade itself was a vertical call spread (as opposed to our usual straightforward call- and put-buying recommendations on stocks and non-leveraged ETFs). This particular trade was a May 12/13 bull call spread on the ProShares Trust Ultra VIX Short Term Futures ETF (UVXY) -- and since the strategy achieved its target profit of 150% after only two days, we thought it would be useful to analyze here some of the key factors that played into this successful options trade.

RECOMMENDATION: Following the entry guidelines as laid out below, place a day limit order to BUY (to open) the ProShares Trust Ultra VIX Short Term Futures ETF (UVXY) May 19, 2017 12-strike call, and simultaneously SELL (to open) the UVXY May 19, 2017 13-strike call at a debit of $0.36 or better. At the close on Friday, May 12, the UVXY May 12 call was offered at $0.70, while the UVXY May 13 call was offered at $0.35. UVXY closed at $12.41 on Friday.

This recommended vertical call spread trade can be described as "bullish on UVXY" and thus "bullish on volatility," but such broad statements need to be taken in a very limited sense. UVXY closed on Friday at $12.41, and this trade reaches its targeted profit of 150% on a rally by UVXY to $13 or higher -- and if you are familiar with the wide swings in UVXY, then you know this is indeed a very minor "rally."

In fact, this vertical spread (through its maximum entry price) has been designed to break even if UVXY finishes flat on May expiration Friday -- compared to its close on Friday, May 12. And it is this attractive reward to risk parameter that is the major driver for this trade recommendation -- namely, that very short-term premiums for volatility-based options has rarely, if ever, been priced cheaper than it was at the market close on Friday...

Per the original trade notes above, the trade would have broken even if UVXY finished flat, and it profited when UVXY rallied -- so there were multiple outcomes possible for the underlying's direction that did not involve a loss on the trade. I'd describe this as having been a function of the general benefits of trading verticals (as opposed to the straight purchase of calls or puts), plus some added perks provided by applying this strategy to UVXY calls.

In the more general sense, I'd say a vertical spread trade that does NOT provide (relative to straight purchases) a significantly lower bar for breaking even at expiration, plus a similar lowering of the bar for achieving doubles (and, in my world, triples), is one that's simply not worth taking. But since we never receive "something for nothing" by adopting an options strategy, the advantages of the vertical on the big profit side will begin to disappear once the higher strike is exceeded, and the straight purchase will eventually provide superior gains as the vertical reaches its profit potential cap.

The above cited areas of advantage for the vertical strategy are even further accentuated when we purchase a vertical call spread on UVXY (subject to a partial disclaimer to be discussed later), because implied volatility begins to soar at call strikes further and further out of the money (in other words, there is a "positive volatility skew" for UVXY calls similar to the "negative volatility skew" for SPY puts). These big skews exist because UVXY call players are heavily drawn by the chance for achieving tremendous upside in a very short time frame.

So if you felt (as many who play UVXY weeklies actually do) that UVXY could rally to $15 or $16 by Friday, 5/19, then why mess with the 12-strike call when you can achieve all that extra leverage (at lower dollar cost) with the 13 strike? But it doesn't stop there -- and so the demand for strikes of 14 and 15 and higher is such that IVs tend to soar at the higher strikes. But our purchase of the 12-strike call and our concurrent sale of the 13 strike in effect said to these wild-eyed volatility bulls, "You can have all that blue sky above $13." And we were paid handsomely for doing so -- in terms of a very cheap call vertical for which a 150% gain was very much achievable.

...One factor that may work in favor of this trade recommendation is the fact that the May VIX options expire on Wednesday of this coming week, which will remove almost 5 million open May VIX calls from the equation -- the replacement of which could exert downward pressure on the stock market through upward pressure on volatility levels.

Another point that has escaped much general attention is the fact that the VIX -- though admittedly reaching last week its lowest levels since 2007 (or since 1993, depending on your favorite financial media outlet) -- has been quite stable in the 10-11 range since May 1. And continued VIX stability is a prerequisite for the success of our recommended UVXY vertical call spread trade...

Let's talk about this description of "continued VIX stability" as a "prerequisite for the success" of this trade, given that we collected profits on a day where VIX spiked. The point I was getting at was that volatility-based instruments like UVXY have a built-in downward bias due to their obligation to continuously purchase higher-priced VIX futures contracts that eventually converge with "cash VIX" -- even if cash VIX traded flat as a pancake. But if cash VIX is at the same time declining steadily, then as a trader viewing an intraday chart, you'd swear you could almost see UVXY steadily deteriorating before your eyes.

And under those circumstances, it is a bit disingenuous to set up a UVXY call vertical and pat myself on the back for proclaiming that we'll break even at a level below the current price of the underlying. Because this "ain't no ordinary underlying" -- rather, it is one for which a decline between Monday and Friday of any given week is to be expected.

But if, in fact, the VIX had found some stability in the 10-11 area -- and it might actually RALLY toward the top end of that range over our holding period - then the deterioration in UVXY would either be greatly mitigated over our planned five-day holding period, or UVXY might even catch a little bit of a rally.

So by "prerequisite," I really meant that VIX stability was a necessary condition for taking this trade -- otherwise, what looked to be a "bargain vertical" was really not much of a bargain at all. But this was by no means a sufficient condition for taking this trade; you really had to believe you had better than a typical shot at experiencing some sort of VIX spike over the holding period.

Finally, implied volatility for UVXY options was (as of Friday, May 12) lower than 99% of such readings over the past 12 months (per Trade-Alert), and the 30-day implied volatility at 93.8% was a mere 2 points above the 52-week low set on May 8 (also per Trade-Alert). Historically low levels of implied volatility serve to increase the upside leverage for this trade (at UVXY prices approaching the 13-strike), and also serve (along with strict adherence to the recommended limit price) to reduce the break-even level for the trade.

As a final point of clarification: The historically low level of UVXY implied volatility that I had cited benefited buyers of UVXY vertical call spreads AND the straight UVXY call buyers. But the positive skew discussed above was only of benefit to those who purchase UVXY call verticals, and in many cases this skew was a major detriment to straight UVXY call buyers. And if this point makes sense to you, then you fully "get" the preceding discussion.

The CBOE Volatility Index (VIX) dipped into single-digit territory earlier today -- hitting an intraday low of 9.93 -- but was last seen at 10.03. This lackluster action just echoes the longer-term trend of the market's "fear gauge." Minus a few pops to the 15 and 16 marks in recent months, VIX has stayed relatively range-bound near multi-decade lows, and could be on track for its lowest average close in history in 2017, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Nevertheless, one VIX options trader yesterday bet big on a short-term volatility spike.

Within the first hour of trading on Wednesday, two symmetrical 100,000-contract blocks of August 30 and 35 calls changed hands on VIX. Per Trade-Alert, this is a result of a long call spread initiated for an initial cash outlay of $500,000 ([$0.13 premium paid for 30 strike, less $0.08 premium collected for 30 strike] * 100,000-contract spread * 100 shares per contract). Overnight open interest translations support this theory.

If this is the case, the options trader is expecting August VIX futures to surge to 35 by VIX options expiration on Wednesday, Aug. 16. This would result in a maximum profit of almost $50 million for the spread strategist, though they will begin to profit on a move north of breakeven at 30.05 (bought call strike plus $0.05 net debit). Risk, meanwhile, is limited to the initial premium paid.

VIX hasn't printed above 30 since Feb. 11, 2016 -- fueled higher by a Fed-inspired sell-off in global stocks -- and 35 since Aug. 25, 2015. However, a recent VIX options indicator suggested speculators are growing more bullish with their volatility bets, with vertical spreads seemingly in vogue.

Given the current low-volatility regime, it's more than possible that this recent VIX options activity is a result of speculators hedging against another August volatility spike, rather than betting on one, with the weekly Commitments of Traders (CoT) report showing large speculators hold a near-extreme net short position on VIX futures. In fact, as Schaeffer's Senior V.P. of Research Todd Salamone noted in a recent Monday Morning Outlook, "The VIX typically hits its year-to-date lows around the middle of July, before bursting higher into the months of August into October."

With U.S. stocks treading deeper into uncharted waters, the CBOE Volatility Index (VIX) has been on a record-setting mission of its own. Following the expiration of a massive number of July VIX call options on Wednesday, the market's "fear gauge" closed south of 10 for the fifth straight session -- a first for the index. Nevertheless, VIX options trading was accelerated in Wednesday's session, with most of the activity occurring on the call side of the aisle.

Around 768,000 VIX calls changed hands yesterday -- 1.6 times what's typically seen in a single session, and more than triple the number of puts that traded. This was still far below the April 19 annual high of 1.5 million VIX calls traded in one day. Newly front-month August VIX options saw the most activity, accounting for eight of the 10 most active options.

The August 12 call saw the biggest increase in open interest overnight among near-term contracts -- second only to the December 15 call -- with 32,618 contracts added. Data from the Chicago Board Options Exchange (CBOE) confirms the bulk of this activity was of the buy-to-open kind, suggesting options traders are eyeing a print above 12 over the next month.

With yesterday's massive influx of new positions here, the August 12 call is now home to 119,799 contracts. However, this is pales in comparison to the August 20 call -- VIX's top open interest position -- which houses 346,739 positions. Following closely behind are the August 30 and 35 calls, with 326,748 and 322,956 contracts, respectively.

Data from the CBOE indicates significant buy-to-open activity at the 20 strike, while the 30 and 35 strikes were used last week to initiate a long call spread -- suggesting speculators are preparing for an upcoming volatility spike. Data from Schaeffer's Senior Quantitative Analyst Rocky White suggests the VIX tends to jump in the August-to-October stretch. With large speculators holding a near-record net short position on VIX futures, it's possible that some of this activity is due to speculators hedging these short volatility bets.

Today, the August 12 call has seen the most action, with 85,457 contracts traded -- nearly 20% of the total intraday VIX options volume -- though it's unclear what exactly is transpiring here. Earlier in the session, VIX tiptoed above the 10 mark, but was last seen trading down 1% at 9.69, set to extend its string of single-digit closes to a record six.

The VIX -- or the Chicago Board Options Exchange (CBOE) Volatility Index -- is one of the most commonly tracked measures of U.S. stock market volatility. It gives us insight into investors' expectations for short-term volatility in the stock market. But how does the VIX impact your options trading approach? To answer that question and more, I spoke with Schaeffer's Senior Trading Analyst Bryan Sapp to discuss all things VIX.

Why do they call the VIX the stock market's "fear gauge"?

BS: The VIX is an index value that is derived from underlying demand for S&P 500 (SPX) put options. That is, when demand for put options on the S&P 500 is relatively higher, the VIX will spike. This generally occurs during market downturns, as investors will oftentimes buy put option protection when the market is on the decline, as opposed to strong bull markets.

What do you make of the record streak of VIX closes below 10?

BS: The recent streak of low VIX closes is both amazing and historic. Given that we’re currently in a market of extremely low volatility, it makes sense that investors aren’t very fearful. Even though the VIX is currently at historic lows, in a sense, it is still overpriced on a relative basis. This is because realized volatility on the SPX has been hovering near 6% to 7% for most of the year. So, even though the VIX is at historic lows, it makes sense given the overall lack of volatility in the market.     

How does a low VIX impact your options trading approach?

BS: A low VIX will be observed most often in trending bull markets. Stocks will generally make small positive moves on a day-to-day basis, as opposed to two-way swings that have more price movement. As a result, it generally makes sense to buy options with more time until expiration, as these options are cheap, and the longer duration will allow a trader to take advantage of the strong market trend in place. The recent winners in some of our options recommendation services, such as PowerTrend and Weekend Trader, provides a good example of how longer-dated options can perform really well in an environment like this.

How do you find good premium-selling opportunities in a low-VIX environment?

BS: At Schaeffer's, we generally like to sell relatively high option premium and buy relatively cheap option premium. It can be difficult to find lucrative premium-selling opportunities in this environment, but there are always market events that will cause a spike in implied volatilities. As a result, a trader looking to sell premium can focus on stocks that have earnings, or macro assets around big economic events. One particular strategy that we’ve had success with is selling premium on stocks immediately after they report earnings. The event risk will often disappear or reduce after the news, but options will continue to hold some excess premium, relative to the inherent risk.

Is there anything else you'd like to add about the VIX?  

BS: The VIX is really interesting, in that it can virtually be in a coma for months upon end -- but if and when there’s an event that changes the market landscape, directional action can be extremely violent to the upside. This is a good indicator of reactivity by investors, as things can change in an instant. Attempting to time these spikes has been a fool’s game lately, as VIX call buying has been very popular, but most of those options end up expiring worthless. However, that isn’t to say that there can’t be a prolonged volatility spike looming. There would need to be a significant shift in the current macroeconomic landscape or a major geopolitical event for any such spike to persist. 

With stocks trading near record highs, the CBOE Volatility Index (VIX) -- or the stock market's "fear gauge" -- is just off a record low, and recently wrapped up its longest-ever stretch in single-digit territory. Against this backdrop, and considering the VIX tends to move higher in August, options traders have been picking up VIX calls at an accelerated clip. What's more, one options indicator we watch just sent up a signal not seen since May 2014. Below, we'll take a look at the recent options signal, and what it could mean for the S&P 500 Index (SPX).

The 10-day moving average for the Options Clearing Corporation's (OCC) put/call volume ratio on the "index/other" category just fell below 0.85 for the first time since May 13, 2014, according to Schaeffer's Quantitative Analyst Chris Prybal. Per the OCC, the "index/other" designation refers to cash-settled products -- essentially, excluding stocks or ETFs -- and the monthly volume report indicates that 95% of July's volume was generated by the SPX or VIX. Specifically, 57.87% of the July volume revolved around the VIX, with the SPX accounting for 38.49%.

To determine what this extreme reading might mean for stocks, Prybal ran the numbers to see how the S&P 500 has performed after previous occasions where the 10-day moving average of this ratio has fallen below 0.85. Following the previous three signals, the S&P underperformed in the short term, averaging a two-week (10-day) loss of 1.1% -- compared to an average two-week gain of 0.5%, going back to 2013.

However, by four weeks (20 days) out, the S&P began to outperform, generating stronger-than-usual average returns all the way to the 60-day marker. In fact, the S&P was higher 100% of the time at every single checkpoint after the four-week marker, and averaged a six-month gain of 8% after a signal, compared to 5.5% anytime.

Granted, this is one single indicator, and it's based on an extremely small sample size -- so this study is best considered within the context of a broader technical and sentiment analysis of the stock market right now. In the figurative "laboratory environment," though, this signal is pointing to short-term underperformance for the SPX, followed by longer-term outperformance.

In early July, Schaeffer's Senior V.P. of Research Todd Salamone warned of a seasonality risk for the CBOE Volatility Index (VIX) -- noting it "typically hits its year-to-date lows around the middle of July, before bursting higher into the months of August into October." While the VIX hit a record low of 8.84 on July 26, it spiked to 16.17 today, its loftiest mark since May 18, as anxiety swirled over a potential missile strike from North Korea. The iPath S&P 500 VIX Short-Term Futures ETN (VXX) also popped, prompting options traders to rush to make a play on volatility.

VIX Options Volume Hits Record High

VIX eventually settled the session up 44.4% at 16.04 -- its biggest one-day percentage gain since May, and highest close since Nov. 8 -- bringing its week-to-date gain to 59.9%. The sharp rise in the market's "fear gauge" sparked accelerated options trading, when more than 2.56 million contracts changed hands -- the most ever, according to Trade-Alert. More than 1.98 million VIX calls were exchanged, surpassing the previous all-time peak of 1.94 million calls traded in a single session on July 13, 2015.

Most active was the August 17 call, where more than 171,711 contracts traded. It's not clear how VIX options traders are positioning themselves here today, but this strike is already home to 290,662 open positions -- the bulk of which have been bought to open, according to data from the Chicago Board Options Exchange (CBOE). 

It's likely some of this activity has been a result of those short VIX futures initiating an options hedge against a volatility spike. In fact, the most recent Commitments of Traders (CoT) report showed large speculators had accumulated a record high net short position on VIX futures. What's more, VIX call open interest is at its highest perch since at least July 2010, with 10.3 million contracts currently open.

VXX Call Volume Hits Post-Brexit Peak

VXX hit an intraday high of $13.35 -- its loftiest perch since July 7 -- before closing up 13.6% at $13.29. More than 1.18 million VXX options traded, three times what's typically seen, and a new 52-week peak.

More specifically, 783,235 calls -- the most since June 24, 2016 -- and 405,022 puts traded. However, calls have been in high demand on the exchange-traded note (ETN), with VXX call open interest at the top of its annual range, with 2.97 million contracts outstanding.

The August 13 call is most popular today, with 86,255 contracts traded. This strike is currently home 198,918 contracts -- VXX's top open interest position -- and it's unclear whether traders opened or closed the calls today.

More clear cut is the action at the weekly 8/11 13- and 13.50-strike calls, where 52,830 contracts collectively traded. It looks as if new positions are being purchased at both strikes. If this is the case, the goal is for the volatility ETN to continue to surge through tomorrow's close, when the weekly series expires. On the flip side, bearish volatility traders appear to have bought to open new positions at the August 12 put.