The Option Pit VIX Traffic Light Is Red: Volatility is likely to be stable or drop.
Hey Traders,
On Friday, the S&P 500 (Ticker: SPX) opened down on the lows.
The rest of the day, the S&P 500 essentially meandered higher.
The VIX closed on Friday at 21.15, near its post-pandemic lows:
If you look at the relentless fall in VIX, it is almost a given that the VIX is going to break 20 again.
However, that doesn’t mean it’s all over.
Look at the VIX futures curve:
August futures are trading at a normal level to the cash index.
However, EVERYTHING beyond August is super-bid.
The spread between the September future and the cash VIX is almost 5 points.
And there is still huge open interest on upside calls …
On Friday, we saw two giant ratio spreads go up:
A trader bought the Sep 35/75-strike call 1-by-3.
A trader also bought the December 35/70-strike call 1-by-4.
These trades are interesting in that they are looking for a move higher.
Near term, I think the play is short August VIX and long puts in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) and 2x Long VIX Futures ETF Fund (Ticker: UVIX) …
But I would be using some of the profits to buy a few September and December call spreads.
Your Only Option,
Mark Sebastian