The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.

Hey Traders,

Thursday was another bloodbath for the VIX and VIX futures.

Yet we continue to have an incredibly steep VIX curve …

Is this a sign of impending doom?  

Or is it simply a market that is really hedged, so it can go up?

Here is your answer …

Despite the drop in VIX futures today …

Which led to iPath Series B S&P 500 VIX Short Term Futures ETN (Ticker: VXX) and ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) getting pummeled …

The VIX futures curve is still INCREDIBLY steep:

With the VIX at 15.59, the August future is STILL trading at a 1.40 premium …

This future only has THREE trading days left.

But it is not going unnoticed …

Traders are coming out of the woodwork to try and make money on this spread.

About one-third of all option volume in VIX today targeted four strikes: the August 18-, 17-, 16-, and 15-strike puts.

Traders are making massive bets that the VIX is going to stay below 16, and possibly even go lower …

This would drag that future curve to levels we have not seen since the pandemic started.

So is the market predicting impending doom?

In the futures? Maybe.

But in the options pit? Heck no! 

The truth is the steep curve might actually be assisting the VIX lower.

The steep curve is a sign the market has lots of hedges on …

That is what is holding the curve up.

With the curve expensive because of hedging, traders are not afraid of sell-offs.

This keeps the market from dropping, because there is no rush to sell …

Which in turns causes rallies, and causes the VIX to drop … and so on.

So do I think we could see a VIX pop?

Sure, it could happen.

But at this point, the Smart Money and the VIX curve say “maybe not.”

If you think it could happen, take a look at yesterday’s post on VIX straddle prices.

That trade is still there (although more expensive).

Your Only Option,

Mark Sebastian