The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To be Stable or Drop.

Hey Traders,

VIX closed on Wednesday at 18.90, below 19 for the 1st time since January 12th.

But the VIX futures are not nearly as low.

We currently have a MASSIVE near-term contango in VIX futures:

The April VIX future, which expires on April 22, about four weeks from now, is trading at a 3-point premium to cash.

This is happening at the same time that two new VIX exchange traded products (ETPs), 1x Short VIX Futures ETF Fund (Ticker: SVIX) and 2x Long VIX Futures ETF Fund (Ticker: UVIX), are listing on Wednesday.

What does this mean?

If things stay as they are, SVIX could make a swift move higher, and UVIX a swift move lower even faster.

I’ll go through these two in detail once they list options.

For an option trader, for now, we could see a bloodbath in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).  

If VIX stays low, at the current contango, UVXY could threaten 10 by April expiration.

iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX), which is trading at a huge premium to fair value, could see even worse.

Barclays announced they are going to refile their ETNs so they are able to begin issuing again.

Once that happens, VXX is going to collapse.

For now I think the play is long UVXY puts, long VXX put spreads or flies, and long VIX call spreads.

Your Only Option,

Mark Sebastian