The Option Pit VIX Light is Red, and We Expect Volatility to Drop.
Hey Traders,
The VIX of VIX is called the VVIX.
It’s the calculation used to determine VIX pricing … but applied to VIX options.
VVIX tells us how expensive it is to buy or sell VIX options.
And it is stubbornly high.
Take a look at a 5-year chart:
For years, the VVIX saw highs in the 200s, but then would quickly drop down below 100.
Normally we would consider a 100 VVIX (especially in a sub-20 VIX environment) to be high.
For the last year, though, 100 has been the floor.
With the VIX dropping, the VVIX has held above 110 and is currently around 113.
Why are these options so high?
Are traders racing after calls to hedge (which is the normal driver of a high VVIX)?
Nope.
In fact, it is the opposite: VIX traders are buying up puts left and right.
SO, as we drop, the bid on out-of-the-money (OTM) puts has managed to hold up VVIX the entire time.
The issue appears to be the huge volume and open interest (OI) that we are seeing in OTM puts on VIX.
Check out the current OI in April VIX options:
There are over 100,000 options open on EVERY strike from 22 to 17.
Almost all of that activity is buying puts … playing on the VIX to drop.
That paper (purchase flow) is running VVIX hot.
Under normal circumstances, I would expect the 17 puts to be offered at .05 — but they are .10 bid …
That is a big shift up in implied volatility.
All of this paper is driving VIX higher…
It's also a sign that the smart money thinks this VIX drop will keep going.
I am actively trying to buy puts in April to play the VIX going lower …
But the solution might have to be a bear spreading or using a butterfly to take advantage of the VIX falling.
The Option Pit VIX Light is Red, and We Expect Volatility to Drop.
Your Only Option,
Mark Sebastian