The Option Pit VIX Traffic Light Is Green: Volatility Is Likely To Stay Elevated.

Hey Traders,

On Tuesday the S&P 500 (Ticker: SPX) TRIED to break out higher …

Only to fail.

What looked like a serious bear market face-ripper … fizzled.

The S&P 500 closed the day down about 30 bucks, and VIX was down 1.32 points to 35.13 …

A negative correlation break.

Is this a green shoot … or something else?

When the VIX is priced at 37, that implies a daily move of 2.33%.

From low to high and back, the S&P 500 managed a daily range of 106 points … pretty close to that 2.33% number …

It was a WILD ride for about an hour:

But frankly if you throw out the midday pump fake-out, the S&P 500 really did not do all that much, and it closed down .72%.

That is roughly one-third of the needed movement to “pay the rent” on VIX at 37 …

So what happened? 

VIX dropped ALL THE WAY down to …

35.13.

Thus VIX dropped because the S&P 500 didn’t move.

This will happen in the midst of a sell-off or at the end.

Every MAJOR sell off has a lull when the market hits a bit of volatility fatigue.

“Volatility fatigue” is when the market gets so tired from whipping, it simply starts to slow down a bit.

The question is, what is next?

If we see another mild down day with VIX down and can carry that through a CPI number, we might be in line for a little rally.

But if the next few days we come in and it’s more of the same, VIX might head right back higher.

At this point I think VIX is going to 40.

We have been in backwardation for 12 days now without a REAL scare.

I think we need that before the market can snap out.

For now, I would buy call spreads and call flys, and hedge with a few puts.

Your Only Option,

Mark Sebastian