The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders, 

The S&P 500 ended the day on Thursday up 20 points.

The VIX was also up, closing at 15.50, up .34.

This is not usually a good thing.

But nonfarm payrolls were set to be released on Friday, so maybe traders were just buying protection ahead of the big announcement?

Maybe …

But check out the CBOE SKEW Index (Ticker: SKEW):

Traders are hedging with baby puts again.

And VIX of VIX, the VVIX, was also higher on Thursday:

Option prices in November in particular were up significantly …

So yes, this 100% could be traders hedging off headline risk …

But, if traders are worried about headline risk, why are they buying baby puts?

If the VIX continues to show strength as the market rallies, we are heading for another knee-jerk sell-off.

If the VIX doesn’t drop on nonfarms, we will likely see the same thing.

Keep an eye on VVIX and SKEW, as the movement there has been an excellent indicator for VIX traders.

As they rise, it increases the likelihood of those cheap VIX puts (like the November 15-strikes)  ending up out-of-the-money.

So if VIX doesn’t crash tomorrow, I am going to be dumping my short November VIX positions (after all they already have made me some big bucks, especially in my Volatility Edge program).

Your Only Option,

Mark Sebastian