You get a selloff to shake enough people out and buy puts...
And once enough investors are hedged to the teeth or moved to cash, the market starts to rip.
From there, the early shorts get smoked, and then those who were in cash start to feel the FOMO (fear of missing out).
At some point, investors will stop buying puts, which leads to a low VIX reading.
The mainstream idea is that a low VIX means that there is a ton of complacency.
And that complacency means too many people are long the market.
And that the market is going to selloff.
The question I have for you is:
Are you sure about that?
The Baseline Data
The chart below shows us a distribution of the 20 day returns of the S&P 500.
So you take a day, look a month in the past, and look at the change.
As you can see, it's a nice big bell curve.
If you really want to nerd out, it's called a lognormal distribution.
What the SPX Does In a Low VIX
Here's where it gets fun.
We can compare the previous bell curve against a new set of data.
Basically, look for instances where the VIX is under 15 and then see what the returns are 20 days later.
Here's what we get:
If you're squinting your eyes to see the difference, here are some hard numbers:
Baseline (All SPX Data)
- Average: 0.49%
- Standard Deviation: 4.6%
- % Under 5%: 10%
If VIX < 15
- Average: 0.33%
- Standard Deviation: 2.3%
- % Under 5%: 2.1%
How The Market Actually Trades
Simply put, if you're looking for some kind of market collapse because the VIX is under 15... you're going to be disappointed.
Over this entire sample, there have only been 25 instances in which the market sold off over 5% after the VIX was under this level.
You'll also see that both the average return and standard deviation are lower.
This makes sense. The largest rips higher happen after deeply oversold readings so you should expect a grind.
And with the standard deviation so low, it means that price movement will continue to compress.
If you're looking for a move lower, you better wait until we get some actual confirmation before you load up on the puts.
How to Trade A Low VIX
If you want one simple option strategy that profits in this kind of trading environment, you'll want to view this free video report I put together.
I'll personally step you through a set of trading strategies that consistently outperform the market, and one strategy that works great when the VIX is low.
You'll also have the opportunity to get a premium trading course from me so you can build out a profitable trading system of your own.