The Option Pit VIX Traffic Light Is Yellow: Volatility Is Likely To Move Wildly
Hey Traders,
Here is a question for you …
Why is the VIX so low?
Now I know you might be thinking, “but … the VIX is 30 … isn’t that high?!”
Yes and no.
Remember the VIX is sensitive to change in price, so adjusting for that, VIX really is not THAT high …
Especially given the intraday moves we have seen in the SPX.
So what gives? Why isn’t the VIX higher … and why isn’t the VIX of VIX, VVIX, higher?
Let’s take a look …
First, we need to acknowledge this: the market is dropping.
An investor has two options …
The investor can buy puts or calls in VIX …
Or the investor can sell.
If they choose the first option, what that tells me is that in the short-term, the investor does not like what he or she sees …
But long-term, the investor thinks the market is going up.
If they choose option two, the investor not only doesn’t like the short-term, but also does not like the long-term outlook for the market!
So, when I look at the VIX of VIX (VVIX) and the recent performance of the market …
The answer to what is going on in the VIX itself starts to become clear:
Despite the VIX going above 33 on Tuesday, VVIX was never really able to get a lift.
Why?
The answer is Big Money is not hedging.
Big Money is selling.
This is why VIX did not make a new high as the S&P 500 (Ticker: SPX) approached new lows on Tuesday.
This is why the VIX stayed down in spite of the market giving away almost all of its gains on Wednesday.
Traders and investors are not buying SPX puts, and they are not buying anything in the VIX.
So what does this mean for the market?
Take a look at the early 2000’s.
While the market grinded lower, VIX really did not do very much.
Take a look at this chart of the S&P 500 and the VIX for the first six months of 2002:
Over the course of six months, the S&P 500 dropped almost 16%.
Now look at the VIX … you see the index getting excited at all?
Not really.
If history is going to repeat itself …
We may be in for a slow grind here for a few months.
Your Only Option,
Mark Sebastian