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

Hey Traders,

The FOMC decision is out and the market – much to the surprise of many – seemed to like it.

The VIX curve had a massive shift …

The shift was so hard that my indicators are all starting to turn yellow.

While we are still green, we have the distinct possibility that things turn yellow at the end of the day on Thursday.

So what was the dramatic shift in the VIX curve?

For the 1st time in over a month … the VIX futures is in a contango (futures trading higher above cash VIX):

While the curve is still very flat, it is clearly in contango all the way out to month four.

With the VIX of VIX, VVIX, falling as well:

At 115.1, VVIX is at the lowest level since early January.

If things stay as is, we are going to see a yellow light at the end of the day on Thursday.

What does this mean for the VIX?

We can expect huge moves.

We could head back to a green light and see VIX go to 40.

Or we could see the VIX move back to the new normal which is 20.

If the latter happens, VVIX could continue to drop all the way down to 100.

This means owning options could be a problem.

We still have iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) trading at a massive premium to its fair value…north of $3.

So what is the play?

Mid-day on Wednesday in Volatility Edge, we bought a bearish VXX put spread.

I think a play like this could pay off handsomely.

I also might like put spreads in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY), as the ETF could fall dramatically if things stay as-is.

That will be a play I look at soon for Vol Edge … if you want it, join me here.

Your Only Option,

Mark Sebastian