The Option Pit VIX Traffic Light Is Yellow: Volatility Is Going To Make Wild Moves.

Hey Traders,

The VIX light is still yellow (despite my belief the VIX is going to drop) …

We can expect some more wild moves in the VIX ahead.

The S&P 500 (Ticker: SPX) boomed higher on Monday, rallying over 65 points.

VIX, adjusted for the Weekend Effect, took it in the chin …

VIX ended the day in the red ending the day down 0.28 to 17.68.

But remember coming off a long weekend, we would expect the VIX to be up close to a point.

So the 0.28 drop in VIX is pretty big.

Volume was relatively light, with most of the action in WAY out-of-the-money calls, and February and March puts.

But here is the thing that has me wondering how long this vol crush lasts …

It’s the VVIX, the VIX of the VIX.

VVIX is still REALLY high:

Yes, it is at a post-Thanksgiving low …

But even so, the index is trading at 115 … that’s not low.

This means there is still a lot of demand for protection.

It also means that VIX, iPath S&P 500 VIX Short-Term Futures ETN (VXX) and ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) are not cheap if you are looking to fade.

The good news is that the drop has been so hard, it’s been difficult NOT to make money being short volatility.

The bad news is that unless VVIX breaks from here, we might not have a lot of time left in this rally.

At this point I think 4,800 is a forgone conclusion for the week … but it might only be intraday,  and it might get faded hard.

Markets don’t need great reasons to sell off when they are frothy.

And the move over the last few days has been astounding.

The S&P 500 has managed to rally from a low of 4,531 to 4,791 in seven calendar days … just four trading days…

That is impressive.

If we do not get some selling this week, I do not expect a happy start to the new year …

I will be taking off almost all of my short volatility/long SPX by Wednesday, save some YOLO (You Only Live Once) calls I have laying around in SPX.

Your Only Option,

Mark Sebastian