The Option Pit VIX Traffic Light Is Green: Volatility is likely to stay high.
The VIX closed Wednesday up .26 … just a smidge higher on a day the S&P 500 fell about 25 points.
Given the VIX is in the 30s, it’s not a huge surprise there was a lack of movement ….
On its surface …
But I have to say, I thought the S&P 500 might melt down on Wednesday.
Why?
Bonds:
The top chart is the price action using 5 min candles of futures on the 10-year note one Wednesday, the bottom chart is S&P futures.
Notice that at noon central time the 10-year note got SMOKED … the S&P 500 went down with it.
Then the 10-year recovered … before melting down for the rest of the day.
What is surprising is that as bonds closed near the lows … the S&P 500 actually rallied?
VIX futures on the other hand DID take notice.
While the VIX Nov future did not settle at the highs it certainly perked up when the 10 years began to fade.
One thing to remember is that VIX is as much a bond product as it is an S&P 500 derivative.
Bond traders will use VIX futures to hedge their interest rate positions.
Options on VIX also seemed to notice with November calls trading heavily on Wednesday:
We continue to see positions built in November …
That seems to be where the smart money thinks the end game is for the market …
For now … buy VIX call spreads in November … hedge with longer-dated puts.
Questions about that? Email my Customer Care Team with the subject line Iron Butterfly.
Your Only Option,
Mark Sebastian