The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.
Hey Traders,
The Option Pit VIX Traffic Light is red, telling me that volatility is likely to drop …
Or is it?
My light has been glaring red the last few days …
Today was different.
The S&P 500 (Ticker: SPX) was up …
But so was the VIX.
Why?
And more importantly, what does this mean for volatility?
Negative Correlation Break
The SPX was up about 8 points today, well off the highs that took the index nearly to 4,600.
At the same time, we saw the VIX rally:
This is the first time we have seen a break in SPX and VIX negative correlation in some time.
So what is the cause?
There are two potential answers.
-
We are topping out.
-
Earnings from the mega-caps.
The answer could actually be both.
We saw tonight that Microsoft (Ticker: MSFT) was up-to-flat, and Alphabet (Ticker: GOOGL) was down-to-flat.
In the end, the net effect on the S&P is pretty nil.
At the same time, if the mega-cap earnings are not going to cause a rally, that is a decent sign the market might be a little toppy here.
Do I think we have a huge pull back coming? No …
But could we sit and spin for a bit, or have a soft patch pull us back to 4,550 or lower?
Yes, for sure …
So what to do?
I laid out how to hedge: buy puts, buy a call spread.
I would use any softness though as a chance to accumulate short volatility.
This market is going to go higher through Thanksgiving, and the VIX is going to 14.
Your Only Option,
Mark Sebastian