The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.
Hey Traders,
On Thursday the VIX was up and the SPX was up at the same time …
Not usually a good thing.
If this continues, we might switch the Option Pit VIX Traffic Light …
But …
Here is another reason:
On a light day for VIX option trading (only 388k contracts traded), a customer came in and executed this trade:
The customer bought the December 21 straddle paying $5.45.
This is slightly in-the-money, and VIX December futures are about 20, so it leans bearish …
But that is not what is important.
What is important is that this trader only makes money if VIX makes a wild move.
He or she needs the VIX below 16 at expiration, or above 26.
Either way, that would be a big move for the future.
We have seen VIX expirations in the 16’s (like Wednesday) …
Last month, VIX did settle at 15.35 …
But outside of that, there is not a lot that would make a trader hopeful …
Unless VIX is really getting set up to die in December.
Remember the CBOE SKEW Index (Ticker: SKEW) is back to normal, and volatility in the overall S&P 500 is low:
10-day, 20-day, and 30-day day historical volatility (HV) are all below 9.
VIX might be set for a drop …
On the other hand, we could see a pop …
That would be more in line with what many retail traders are looking for.
The basics of this trade is that it is probably a hedge, where the trader is looking to break even or better if the VIX falls …
And clean up if the VIX pops…
Your Only Option,
Mark Sebastian