The Option Pit VIX Traffic Light Is Green: Volatility Can Go Up.

Hey Traders,

It has happened …

The Option Pit VIX Traffic Light is green.

After Thursday’s late-session sell-off and VIX pop, I knew there was a good chance that I would be changing the light during Friday’s trading session.

What was it that convinced me to switch the light to green?

After watching VIX shooting higher late on Thursday, and early on Friday, the VIX futures curve has now entered backwardation – so futures are trading below VIX cash price:

This is a sign that the market is really stressed, and traders are more concerned about near-term risk than future risk.

There is also the matter of VVIX … the VIX of VIX.

The VVIX tells us the vol of vol … or the change in vol of VIX options, giving weight to at-the-money (ATM) options.

The VVIX popped much higher on Friday … as high as 147, before paring its gains slightly.

Back before COVID times, any VVIX above 100 was considered high … but since the pandemic began, the index has really only tapped below 100 a few times, and briefly at that.

The VVIX popping indicates that demand for VIX options is growing … traders are hedging.

So with VVIX spiking higher, and VIX futures in backwardation … traders are nervous …

I think we could be in for a bumpy ride.

Your Only Option,

Mark Sebastian