The Option Pit VIX Traffic Light Is Red: Volatility is likely to fall or stay low. 

Hey Traders,

On Wednesday the CPI number was released …

Leading into this, we could tell this is a huge deal for markets and VIX has clearly taken notice.

Ahead of the CPI number we have seen VIX slowly pull itself off the mat and move higher.

So what is next?  

In part, the CPI release will answer some questions …

However, CPI is not the only thing driving volatility …

To say the S&P 500 (Ticker: SPX) has been in a range would be an understatement.

Check out SPX over the last 10 days:

While moving around a bunch intraday, the index has essentially gone nowhere …

10 days ago the SPX was 4,112… on Tuesday it closed at 4,119 …

A whopping 7 points of movement.

Realized vol in the SPX has died:

While implied volatility (IV) is relatively low, you can see that realized volatility (RV) – how much the SPX moves from day to day – has tanked. It’s a stone’s throw away from hitting recent lows.

So something has to give. The IV tick-up corresponding with dying actual movement cannot last.

In the near term, the easy money in August is gone, take your dollars and leave …

Long term the VIX futures curve is saying things are going to get ugly …

Over the course of a week, we have seen a giant trend in the VIX futures:

Kill August, let September trade, and buy long-term.

That continues to be the approach … although as stated above, I think August has run its course.

I would set up a short trade in September and buy a ton of October, November, and December …

Your Only Option,

Mark Sebastian