This was regular expiration week, which can produce some volatility, but not this week. The S&P 500 had yet another week of extremely low range, as we sit just 3 points below last week’s close. It did hit another new all-time high on Monday, touching 2193. But it has just chopped since then, right now at 2182.

The VIX remains below 12 and in a squeeze. It currently sits at 11.72. While the VIX is a measure of the expected volatility, the actual volatility is less than half of that. The 20-day historical volatility for the SPX is down below 5.5 percent – suggesting that for right now that low VIX is too high!

These markets are hard to trade. The market is clawing its way higher, and you can’t fight the tape. Many are waiting for the inevitable pullback, but you don’t want to lose money waiting for that to happy.

John pointed out that “the price action remains bullish, but the red flags are flying”. He mentioned warning flags in the VIX, the SKEW, and the Put/Call Ratio. “I don't want to be long and complacent, but I don't have a signal to go short. These means I focus on shorter term moves and I'm keeping a large cash position to get ready for a potential sell off - even if it is a modest reversion to the mean.”

Chris too pointed out that the SPX momentum has been straight up, “which you have to respect”. He is watching for another VIX sell signal as well, which he explains in his premium video. He is playing some of the “monster stocks”, but also hedging with a bit of ES. He was also heavily focused on his unusual options volume.

Chris' Unusual Options Activity Class

Henry points out that even if this is the next leg higher “I just can’t buy it here”. He has found that “the less direction I pick, the better I’ve fared.” His various butterfly trades have been working well, including in GDX.

David has moved to a neutral stance. “The S&P 500’s move up from late June is becoming mature and is at a level where it could reasonably be seen as complete.” He followed up by warning of a possible pullback. “While this doesn’t herald the end of the bull market, it does warn that we could be getting close to a multi-week pullback which could take back a significant portion of what has been gained since early Summer before buyers come back in the market”.

Tony was bullish, but sort of by default. He pointed this out in his morning note, “I think the market goes up just because it refuses to go down”.

If you are a stock trader, this can be a good time to consider stock replacement strategies. With volatilities so low, replacing long stock exposure with long in-the-money calls or call spreads can make a lot of sense. That gives you the upside exposure you want while greatly limiting your downside when that eventual pullback comes.

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This article was written by Simpler Trading's Editor-in-Chief, Chris McKhann

Chris McKhann has been involved professionally with the stock market for more than 15 years and specifically with derivatives for 12 of those. He started as a stock broker, but quickly moved on to options and futures trading. He spent some time as the Derivatives Product Manager for TD Ameritrade. He was the chief analyst and hedging strategist for OptionMonster. He has been an options trading educator and content provider for many years. His writing and analysis has been featured on Reuters, the Wall Street Journal, Forbes, TheStreet, CNBC and internationally. He has also designed and traded option and futures strategies for prop trading firms and hedge funds as well as managed accounts.