The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to swing wildly

The VIX closed on Wednesday, post-FOMC, up about .83 points to 27.99…

But I think VIX is going to go up

How do I know?

Check out the VIX curve at the close:

The curve itself is now backward out 3 months.

The only thing stopping my light from being green is the cash index trading at a discount.

But when the curve is backward before the VIX itself, that almost always means we are going to see VIX catch up…

Remember, the VIX futures traders are the smart ones … not the traders using SPX options.

With this formation, I think the S&P 500 is going to take out new lows. We are only about 80 points from the low of June.

When we hit that, the next stop is probably higher, but from there? Lower again…remember this is going to be a grind.

That said, VVIX is CHEAP, given the curve.

For 28 vol and a backward curve, a 92 VVIX is almost unheard of.

This means VIX options contracts are cheap.

I am looking at the 30-37.5-45 call fly in VIX for less than $1.50. That has a really nice 5-to-1 pay off.

Against it I like the 23 puts for .35,  those are cheap.

Your Only Option,

Mark Sebastian