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Hey Traders,

Even with the sky-high Producer Price Index (PPI), markets are higher on Wednesday …

And the VIX is cratering.

The market doesn’t like uncertainty, and it is showing us that “bad news” is better than “no news.”

As we head into the long weekend, what should we expect next?

And how should you trade it?

Let’s take a look.

Right now, the VIX futures curve is in a strong contango …

Futures are trading nearly an entire point above spot VIX, with expiration right around the corner (next Wednesday):

That means futures will need to drop an entire point over the next three days of trading … or further, if VIX continues to drop.

Looking ahead to VIX expiration …

With the “unknowns” (like CPI and PPI) becoming “known,” I expect the market to react favorably.

And if today’s rally holds, we could see an end-of-week vol crush into the long weekend.

However, come Monday it will be important to take into account the Weekend Effect.

What is the Weekend Effect?

Since we only trade five days per week (or in this case, four days) instead of seven, during the week, market makers must “decay out” the extra time premium (theta) baked into options.

So options value decay artificially quickly during the trading week.

The VIX, which looks at S&P 500 (Ticker: SPX) options, does not “know” that it is actually theta being decayed out of options, and thus it reads this as falling volatility instead.

Therefore, statistically, VIX falls four days per week.

The only day the VIX is statistically higher is on Monday, when the market maker’s options pricing and the VIX model are actually aligned.

Coming off of a three-day weekend, we would typically expect to see the VIX about 1 full point higher.

So come Monday, anything less than a 1-point increase means the VIX is actually down.

We will have Monday’s trading session and Tuesday’s trading session to see this weekend effect fade before expiration.

Now … how would I trade this?

We have three full trading days left until VIX expiration.

The 20-strike puts are currently trading at $0.10.

That is a very good value. I would be a buyer.

Your Only Option,

Mark Sebastian

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