The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move.
Hey Traders,
I hope you all had a restful holiday weekend …
Because markets sure didn’t hesitate to get back to business on Tuesday morning.
Right now, the Option Pit VIX Traffic Light is yellow, telling us volatility is ready to make a move.
The question is … in which direction?
Well, the VIX curve is super tight …
The front-month future is practically sitting right on top of the VIX cash index.
We even reached partial backwardation (futures trading below spot VIX) early during Tuesday’s trading session, but the partial recovery pulled us back into contango (futures trading higher over spot).
VIX is down on the day, and VIX of VIX, VVIX, is trading around 87 at the time I am writing this.
Why is vol so cheap?
Well, one of the reasons is that traders are just not buying crash protection puts.
A demand for crash protection puts would raise the price of VIX options …
But that is just not happening.
The Cboe SKEW Index indicates IV for crash-protection puts in the S&P 500 (Ticker: SPX).
And it has been hanging at annual lows for about a month.
If we see the SKEW index pick up … then we might be at a tradable bottom.
But until then …
Expect to continue our slow malaises lower … with some violent rallies thrown in.
Personally, I like buying puts in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY), and call spreads in VIX.
Your Only Option,
Mark Sebastian