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

Hey Traders,

The VIX sold off again on Tuesday.

But if you were not paying attention you would have missed what happened in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).

UVXY hit a new all-time low on Tuesday …

But how can this happen when VIX is 18.40, up from a week ago?

The UVXY hit its new all-time low on Tuesday after trading at 11.67 at the close.

Interestingly, VIX is a full two points higher than it was only a week ago.

Check it out:

How is this possible?

Remember, the UVXY is derived from the VIX futures, not the VIX itself.

Since last week, we have gotten closer to January VIX expiration.

In that time, January VIX futures are flat, and February futures – which account for an increasingly large proportion of UVXY’s holdings – are down:

Thus, even though VIX is up, with the futures down, and UVXY levered at 1.5 times VIX futures,  UVXY is down.

Now … imagine what will happen if the VIX gets back to 16 …

Where does that put UVXY?

The answer is A LOT lower than you probably think it can go.

So what is a trader to do?

You know I think the Jan. 21 10-strike puts are too cheap (they could legitimately turn into a $1.00).

But also check out the Jan. 21 11.5-strike puts. They are only $0.75…

UVXY was down about $0.70 on Tuesday.

One or two more days of vol crush, and UVXY could easily make a run at sub-11.

Your Only Option,

Mark Sebastian