The Option Pit VIX Traffic Light is Red: Volatility is likely to drop.

Hey Traders, 

On Tuesday, we saw a pretty strange market.

While the Nasdaq (Ticker: NDX) was down 2%, the Dow Jones Industrial Average (Ticker: DJX) was actually up over 200 points.

That is a strange occurrence.

The selling in the Nasdaq is trumping the buying in Dow, causing the VIX to firm up a touch here.

In the first week of the year, the SPDR Dow Jones Industrial Average ETF (Ticker: DIA) is the clear winner in performance halfway through the trading session on Wednesday.

I have contended that the year of the Dow Jones Industrial Average being the market leader is coming … this might be it.

But with the strength in the Dow, what surprises me is how expensive DJX options are right now.

This chart trades the difference between VIX and VXD (the VIX of the DJX):

Interestingly, Dow Jones implied volatility (IV) is higher than S&P 500 (Ticker: SPX) volatility.

This doesn’t make a ton of sense, given the strength in the DJIA.

It could be call buying driving it higher, or SPX SKEW starting to fall:

Although SKEW still has quite a ways to drop.

Either way, it appears a put spread swap might work.

In this trade, I would sell 11 DJX put spreads and buy one SPX put spread against it.

I would make money in the net carry, and in the performance of the Dow Jones Industrial Average.

Your Only Option,

Mark Sebastian