Latest / The Day Trading Podcast with Fexingo: Active Trading, Charts, and Short-Term Market Strategy / How Day Traders Read the Coffee Count Signal
Transcript
- Lucas: If you pull up the Cboe options flow feed around 10:15 this morning, you would have seen something pretty striking — a sudden spike in volume on SPX puts at the 7000 strike, which is roughly 7 percent out of the money. That's the Coffee Count. Luna: Coffee Count — I love that name. Is that the signal where a bunch of traders simultaneously buy far-dated, far otm puts, like they're all waking up and hitting the same order? Lucas: Exactly. The nickname comes from the idea that a bunch of traders walk into their local coffee shop, see the same headline, and pile into the same trade within minutes. But in reality, it's algorithmic flow — usually triggered by a VIX spike or a sharp intraday drop. Today the VIX opened around 17.94, which is actually down 4.4 percent over five days, so the Coffee Count this morning wasn't panic-driven. It's more like a reflexive hedge adjustment. But the pattern itself is what I want to drill into. Luna: Right. And before we go deep — I want to mention something. Lucas and I deliberately keep this show ad-free. We don't run commercials, we don't have sponsors. And we'd like to keep it that way. So if our conversations have helped you think about a volatility signal differently, or saved you from chasing a bad trade, consider tossing a coffee our way. The link is buy me a coffee dot com slash fexingo. That's it. No pressure. Now back to the Coffee Count. Lucas: Yeah, and we genuinely appreciate that. So the Coffee Count signal works best when VIX is already elevated — say above 20 — and you see a one-minute burst of put volume at a strike that's at least 5 percent out of the money. That burst is often the climax of fear. Within the next 30 minutes to two hours, VIX tends to mean-revert. Today's setup is a little different because VIX is only at 17.94, so the signal is less about fear and more about positioning. But the mechanics are the same. Luna: So what specifically should a day trader watch? Is it the volume at a single strike, or the total put/call ratio? Lucas: Good question. I look at the volume at the specific far otm strike — today it was the 7000 put on SPX — and I want to see that spike happen in under 60 seconds. If the volume is spread out over five minutes, it's not a Coffee Count. It's just normal hedging. The Coffee Count is a reflexive, almost panicked burst. And then I check the VVIX — the VIX of the VIX — which today is at 95.55, down 1.8 percent over five days. If VVIX is diverging from VIX — meaning VIX is flat or up while VVIX is falling — that confirms the mean reversion is likely. Luna: So the Coffee Count is a contrarian indicator. When everyone piles into puts, you want to be selling volatility or buying calls for a bounce. Lucas: Exactly. And the beauty is that you don't need to trade options yourself. You can just trade the SPY or even VIX futures. If you see the Coffee Count, you wait for the VIX to spike another 30 to 50 basis points, then you sell VIX futures or buy SPY calls. The mean reversion happens fast. In fact, I've backtested this — since 2020, when the Coffee Count triggers with VIX above 20, VIX drops an average of 3.2 percent within the next hour. Luna: Three point two percent in an hour — that's a massive edge. But I imagine it's not foolproof. What's the failure case? Lucas: The failure case is when the Coffee Count is followed by a second wave of put buying within 10 minutes. That suggests the fear isn't exhausted — it's accelerating. In that scenario, you don't want to be a hero. Just step aside. Also, if the VVIX is above 100 and rising, the Coffee Count is less reliable because volatility is in a panic regime. Today VVIX is below 100, so the signal is cleaner. Luna: So today's environment — VIX at 17.94, VVIX at 95.55, markets down modestly over the past five days — is actually a decent backdrop for this trade, even though VIX isn't screamingly high. Lucas: Right. In fact, a low vix Coffee Count can be even more profitable because the mean reversion tends to snap back faster. When VIX is already high, the reversion is slower because there's macro fear. When VIX is mid-range, the spike is often just a positioning glitch. I'd say the 7000 put spike this morning was an institutional roll — someone hedging a large position — but the pattern is the same. Luna: So the key takeaway for listeners is: watch for a one-minute burst of far otm put volume, check VIX level, check VVIX divergence, and if conditions align, fade the fear. Lucas: Exactly. And set a stop — if VIX breaks above the high of the Coffee Count minute, you're wrong. Get out. Otherwise, you've got a high-probability mean reversion trade. I'll be watching for another count this afternoon if we get a dip. Luna: Alright, let's see if the coffee drinkers wake up again. Thanks for listening — and if you want to support the show, you know where to find us.