The Option Pit VIX Traffic Light Is Green: Volatility is likely to stay high.
On Friday, the S&P 500 seemed like it was going to end the day positive.
VIX was soft all day and, at one point, the VIX cash actually fell below the front end of the futures curve.
Then the end-of-day selling happened and the curve closed in full backwardation – capping a full week of backwardation:
But the VIX at the end of the day – despite the selling – was down … why?
Two reasons:
- It was a Friday. VIX tends to loosen up on Fridays, especially after a hectic week. This a function of the calculation.
- We were not down as much as you think. Yes, 3600 broke, but we only dropped 1.51%. That percentage is the equivalent of about a 24 VIX … and the VIX is at 31
This would explain Friday’s softness.
Sometimes the VIX drops with the S&P 500 because the selling is coming to an end …
Other times there is some vol exhaustion.
In this case, I think it was maybe a touch of the latter, and mostly the two reasons I listed.
So what does this mean for VIX?
Like I have been saying, VIX is not going to scream all at once, it is more likely going to whimper as the S&P 500 slowly dies.
That said, it is probably going to 35. I would be buying bull call spreads and flies in November.
I would hedge with some of the cheap puts. Traders will be able to sell those at a nice profit on the next short squeeze.
Questions? Shoot me an email or comment below!
Your Only Option,
Mark Sebastian