The Option Pit VIX Traffic Light Is Green: Volatility is likely to go up.

Hey Traders,

The S&P 500 (Ticker: SPX) was up over 40 points on Tuesday’s open …

It ended the day down almost 80!

That is a huge range for SPX …

Meanwhile, the VIX closed up 1.41 points at 28.36.

Seems a little low, right?

Is it though?

The answer is probably yes.

Take a look at S&P 500 realized volatility (RV, or how much the S&P has actually been moving):

SPX movement has not been below 30 in the last two weeks, and even the 10-day RV (purple line) absolute low since April is still about 21%.

Given that there is usually some risk premium built in, shouldn’t VIX be in the 30s?

Yes and no.

Yes, SPX is moving ALOT, but remember realized vol looks at trading days, and implied volatility (IV, the VIX) looks at calendar days.

When we look at movement over calendar days, then the VIX and SPX movement start to look a little more in sync.

Plus, do not forget that we have a long weekend coming up.

If the S&P had not sold off on Tuesday, the VIX was going to break 26 …

ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) was going to break 13.

Now that we have seen selling, we could see things pick up.

But by how much?

If we do not have a 2% down day Wednesday, VIX might not go anywhere.

We have a long weekend coming up, which is going to tamp things down.

Next week though … if the selling keeps going … with everyone at their vacation home …

That is where things get ugly …

I am a buyer of UVXY puts one-to-one with VIX call spreads.

Your Only Option,

Mark Sebastian