The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.
Hey Traders,
The S&P 500 (Ticker: SPX) was down on Wednesday, and the VIX was up.
But we probably are not due for a huge sell off …
In fact, I think we will start a rally over the next few weeks.
We have entered a new volatility regime.
Where 20 used to be low, it is now high…
While VIX has yet to break 15 on a close, it is coming …
How do I know?
The CBOE SKEW Index (Ticker: SKEW).
The SKEW index continues to flounder:
The SKEW index, you’ll remember, is the cost of out-of-the-money puts relative to at-the-money options.
Even with this small sell off, the index has not caught legs …
Why?
Hedging hasn’t worked.
Money managers are fickle.
They are as close to retail traders as possible, in terms of patience … maybe worse …
They see a shiny object and go after it.
Right now, money managers that tried to hedge are thinking about how they have been getting killed …
They aren’t hedging …
They may be doing some short-dated SPX put-buying, but that is about it …
And when SPX runs hot, they are more concerned about chasing the index than hedging.
So what does this mean?
When the SPX starts to rally again, expect VIX to die.
In Volatility Edge, we are playing this game, looking for the VIX to drop.
There are options in VIX that are getting entirely too cheap.
There is a ton of opportunity in December.
But you’ll have to join me to find out where.
Your Only Option,
Mark Sebastian