The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move Wildly
The VIX dropped .43 points landing at 24.11 …
This was on a day the S&P 500 dropped more than 30 points …
Why is this happening?
There are a few answers …
Let’s start with changes in the S&P 500 …
Starting in May SPX options started trading options every day …
This has dramatically changed the SPX, traders can now place options trades on the exact day they perceive they need a hedge …
If Fed Day is next week, you can buy an option then, remember, VIX uses options with a constant duration of 30 days.
These options are not experiencing event risk in the same way they were.
In addition, when the market is tanking, traders can simply buy puts on the day of the move … they don’t need longer-term hedging the way they used to.
Next, we have the issue of known unknowns …
We KNOW everything that is wrong …
You saw briefly on Tuesday what happens when an unknown happens, VIX reacts …
Take a look at the pop in VIX after that missile hit Poland:
VIX jumped over 2 points in only a couple of minutes
If the situation continued to develop in a bad way … we would be looking at a VIX of 40.
But, that did not happen.
So what do you do?
VVIX is cheap, all the way down to 81.38
The VIX futures curve is contango and is now somewhat depressed:
With 5 weeks to go VIX is only trading 1 point below the curve … some of this is due to holidays, but some of it is aggressive vol sellers.
With options this cheap and the curve this tight, I like long SPX and Long VIX as a pair, it will pay you.
Your Only Option,
Mark Sebastian