The Option Pit VIX Traffic Light Is Red: Volatility is likely to decline.

Hey Traders,

The VIX has a real shot at 18.

It closed at 19.53 on Friday, ending its streak of above-20 prints.

That said, not everything is as it seems with Friday’s price action.

There were two things that I don’t like …

1. Volatility Was Actually Up

Wait … VIX was down, how could vol be up?

Remember, VIX naturally falls when the S&P 500 (Ticker: SPX)  rallies – and it had a big one on Friday.

So it can drop while volatility increases.

Don’t believe me?

Here is a chart of the implied volatility (IV) of the Sept. 16 expiration of 4300 calls over the last two weeks:

Over the last two days, IV has gone up on the strike …

This is a sign traders are selling stocks and buying calls.

2. Did You See the Squeeze-in Vol at the End of the Day?

Even as the S&P 500 took off into the close,  VIX rallied about .25 of a point, which is nothing to sneeze at when the S&P is going up.

So what does this mean … this rally might be getting long in the tooth.

I like puts in August, not so much for the September contract …

Mark Sebastian