The Option Pit VIX Traffic Light Is Red: Volatility is likely to be stable or drop.
Hey Traders,
For the second day in a row, the VIX failed to perform with the S&P 500.
On Tuesday, the S&P 500 dropped over 44 points and the VIX was flat…
On Wednesday, the SPX dropped 31 points and the VIX fell .34
.
The break in correlation of the S&P and the VIX can be a sign the market is bottoming…
But that is not the only reason VIX might fall.
To start, a VIX of 26 implied movement of 1.63% a day for the next month …
So, even with a drop, a 31-point move is less than a 1% move lower … that could mean the VIX is simply too high for the movement.
Thus we would have a slow move lower instead of a fast one.
Here is the other idea, though…
What if this sell-off is a relief to the market?
The rally the last month-plus has been one of the most hated rallies I have ever seen.
Hated so much that even as we rallied, traders were selling stock and buying SPX calls.
Strike vol for the most part went up as we rallied in August.
With the market selling off, traders are selling out of calls and potentially dumping puts.
The point is, we might keep going down, but I am pretty sure we do not have another 3% plus down day coming.
With that in mind, I really like an SPX pair trade …
The VIX is back in contango, meaning the VIX cash index could fall – even if the SPX drops.
I would buy a put in SPX or SPY and puts on VIX
That’s a pair we put on weekly – either bullish or bearish – in SPYMaster. Check out this video where Andrew Giovinazzi and I discuss our latest move.
Your Only Option,
Mark Sebastian