Traders are completely enthralled by the bull market - but surging Nasdaq volatility suggests it is time to hedge
The VIX VIX - the U.S. stock market's "fear gauge" - is drifting lower as traders remain completely enthralled with the bull market. But selling in some of the most popular tech stocks has caused a separate volatility measure known as the VXN XX:VXN - the VIX of the NASDAQ-100 Index NDX - to jump. As a result, VXN minus VIX is at levels not seen in some time.
That imbalance will be corrected and the two measures will converge. The benign way for such convergence would be for the Nasdaq-100 stocks to calm down, allowing VXN to slide back towards VIX. A second scenario is more problematic: a sharp selloff in stocks, causing VIX to jump up to VXN's higher levels.
Some "smart" volatility-oriented traders and trading firms are worried about this latter scenario - a sharp selloff in the market. A similar situation existed in late July and early August 2024, and the VIX soared. That was exacerbated by a surprisingly illiquid market in S&P 500 Index SPX options at the time. Later, the market decline was attributed to an unwinding of the Japanese yen (USDJPY) carry trade, but that was after the fact and probably not the real factor.
In any case, it could be smart to establish some low-cost out-of-the-money position in case a VIX explosion does occur. This could be a purchase of VIX calls or UVIX UVIX calls, at much higher strikes than today's levels. Out of the money puts or put spreads on either SPX, SPY SPY, or QQQ QQQ would serve a similar purpose.
New recommendation: buy UVIX calls
UVIX is a long-only ETF that holds VIX futures designed to move 2x the VIX. Yet leveraged ETFs and ETNs like UVIX are not a direct multiple of their underlying, even though they are often advertised that way. UVIX holds VIX futures, which are trading at a premium to VIX. That premium disappears as time passes, causing a loss to UVIX. That can be countered, though, by a sharp rise in VIX and thus in the VIX futures.
Buy 2 UVIX (Aug. 21) 95 calls at a price of $5 or less.
Currently, VIX is just under 16.0, and in a sharp stock market selloff it could easily rise to 30. So, if VIX doubles, UVIX would quadruple in theory. That actually won't happen because of the negative "drag" of the time premium on the VIX futures. In addition, the VIX futures would likely be trading at a discount to VIX after such a sharp rise. Even so, UVIX only needs to rise by about 50% to get to the 95 strike. So, even with "drag," a 100% rise in VIX should produce well more than a 50% rise in UVIX.
Of course, if VIX doesn't jump higher, these calls will lose their entire premium.
Stock investors are still trapped
The S&P 500 Index (SPX) is still struggling to break out of the trading range formation (a "triangle") that it's been locked in. Earlier this week the index was strong, and it appeared that an upside breakout would be forthcoming. But that was not the case, and SPX has fallen back inside the triangle. A breakdown below support at 7,300 would be bearish. There is resistance at 7,550 and 7,600-7,620 (the all-time highs).
Equity-only put-call ratios continue to rise, and that keeps their sell signal in place. They will continue to portray a bearish outlook for stocks until they roll over and begin to decline.
VIX has been drifting lower. As a result, the VIX-related buy signals for stocks are still in place. Those are the "spike peak" buy signal and the trend of VIX buy signal. That will continue to be bullish for stocks as long as VIX doesn't close above 19 for two consecutive days.
The construct of volatility derivatives remains solidly bullish for stocks, as the term structures slope upwards, and VIX futures are trading with a large premium to VIX. We will continue to follow our indicators - entering or exiting positions as required. Continue to roll deeply in-the-money options.
New recommendation: Jack Henry & Associates $(JKHY)$
There is a new weighted put-call ratio buy signal in Jack Henry & Associates (JKHY) (JKHY). The stock is rebounding after a fairly lengthy selloff. During that selloff, put buying reached extremely high levels, and now the put-call ratio has rolled over after forming a local maximum on its chart. That is the buy signal.
Buy 1 JKHY (Aug. 21) 145 call in line with the market.
We will hold this call as long as the weighted put-call ratio for JKHY remains on a buy signal.
Follow-up action:
All stops are mental closing stops unless otherwise noted.
We are using a standard rolling procedure for our SPY spreads: in any vertical bull or bear spread, if the underlying hits the short strike, then roll the entire spread. That would be roll up in the case of a call bull spread or roll down in the case of a bear put spread. Stay in the same expiration and keep the distance between the strikes the same unless otherwise instructed.
Also, for outright long options, roll if they become 8 points in-the-money.
Long 1 BKR $(BKR)$ (July 17) 65 call and long 1 BKR (July 17) 60 put: Roll the call up at $75 and roll the put down at $50. Exit this position now, since expiration is approaching.
Long 2 MHK $(MHK)$ (July 17) 115 calls: These calls were rolled up when MHK traded at $115. We will hold these calls as long as the weighted put-call ratio of MHK remains on a buy signal.
Long 1 BNS $(BNS)$ (Sept. 18) 85 call: Use a trailing closing stop at 83 for the calls.
Long 2 RTX $(RTX)$ (July 17) 195 calls: We will hold as long as the weighted put-call ratio for RTX remains on a buy signal.
Long 2 IR $(IR)$ (July 17) 80 calls: We will hold as long as the weighted put-call ratio for IR remains on a buy signal.
Long 8 expiring CLOV $(CLOV)$ (July 10) 4.5 calls: Roll to the CLOV (July 31) 4.5 calls and raise the trailing closing stop to 4.55.
Long 1 SPY (July 17) 757 call and short 1 SPY (July 17) 782 call: The position will be held until new lows outnumber new highs on the NYSE for two consecutive days.
SPCX $(SPCX)$ butterfly: Long 3 SPCX (July 17) 250 call; short 2 SPCX (July 17) 300 calls; long 1 SPCX (July 17) 335 call.
Long 1 SPY (July 17) 740 call and short 1 SPY (July 17) 760 call: This is the trend of VIX buy signal. Stop out if VIX closes above 19 for two days in a row.
Long 2 VRNS (VRNS )(July 17) 35 calls: Roll up to the VRNS (July 17) 45 calls. Continue to hold without a stop as the takeover rumors persist for VRNS.
Buy 2 ALLE $(ALLE)$ (July 17) 140 calls: We will hold these calls as long as the weighted put-call ratio for ALLE remains on a buy signal.
Send questions to: lmcmillan@optionstrategist.com.
Lawrence G. McMillan is president of McMillan Analysis, a registered investment and commodity trading advisor. McMillan may hold positions in securities recommended in this report, both personally and in client accounts. He is an experienced trader and money manager and is the author of "Options as a Strategic Investment." www.optionstrategist.com
(c)McMillan Analysis Corporation is registered with the SEC as an investment advisor and with the CFTC as a commodity trading advisor. The information in this newsletter has been carefully compiled from sources believed to be reliable, but accuracy and completeness are not guaranteed. The officers or directors of McMillan Analysis Corporation, or accounts managed by such persons may have positions in the securities recommended in the advisory.
-Lawrence G. McMillan
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July 09, 2026 18:19 ET (22:19 GMT)
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