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

Hey Traders,

The VIX closed about 26.80 on Wednesday after the FOMC minutes were released.

The S&P 500 (Ticker: SPX) remained flattish through most of the day, and closed flattish.

I think the VIX is due for a bounce.

That said, the seeds for a tanking are there.

For starters, VIX contango (futures trading over spot) is about as steep as it can get with the VIX at 26.80:

There is the potential – with the current set up – for an exchange traded product (ETP) like 2x Long VIX Futures ETF Fund (Ticker: UVIX) or ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) to get smoked…

We also have the incredibly low VIX volatility – measured by VVIX – as we discussed yesterday:

I think the most important thing I am watching is S&P 500 volatility. It is finally falling. 

Here we can see that the 10-day historical volatility (yellow) and 20-day historical volatility (blue) are trending lower, as is the 30-day implied volatility (red):

In fact, for the first time in months, the 10-day realized vol has dramatically fallen below the 30-day implied volatility on the SPX.

With this in mind, we could see VIX get a major push lower if things stay as is.

While I still like owning the VIX 30-37.5 call spread for July …

I would be a buyer of both UVXY and VIX puts.

The 24-strike puts are about $0.30. That is cheap.

And the 23-strike puts are probably less than $0.15 … that is incredibly cheap and worth a flier.

Your Only Option,

Mark Sebastian