The Option Pit VIX Traffic Light Is Yellow: Volatility Is Likely To Move.

Hey Traders,

On Wednesday, the market sold off 1.23%.

The VIX was up 0.63 points to 23.57, ending an absolute crush of volatility.

But take a look at ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) and iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX).

If you were watching, you may have noticed the volatility exchange traded products (ETPs) didn’t act the way you were expecting.

They did not rally.

UVXY was down on the day:

VXX was flat (I’ll explain why in a second):

Remember, these products are not based on the VIX, but on the VIX futures.

The VIX futures are trading at a wide contango, with futures trading progressively higher over spot VIX. This means that every day, even if the VIX is up … the volatility ETPs can drop.

The problem is the wide spread between April and VIX itself:

That spread is going to put a huge headwind in the face of UVXY.

VXX has been facing some major issues (which we explained here) because Barclays killed share issuance.

Even in VXX, we are starting to see some of the premium come out of that product.

While it could pop on a vol jump, if VIX is going to remain somewhat tepid, VXX is going to start to converge toward its fair value.

I would own hedged puts in that product.

Your Only Option,

Mark Sebastian