The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move Wildly

Hey Traders,

The S&P 500 fell 15.40 points on Monday…

The VIX fell .76 points with the S&P 500.

While you might chalk that up to an ‘inside day’, a day when the market doesn’t move much…

I am here to tell you that you are wrong…

The VIX did drop because realized vol was low on Monday…

But more importantly it dropped because of the holiday.

On a Monday, all other things being equal, the VIX should be up about .7 points…

Instead, on a down day, VIX fell .76.

This was the market pricing out the holiday.

Remember, we are closed Thursday and have a half day on Friday.

That decay needs to go away….ALL of it got priced out on Monday.

So what does that mean? Typically on holidays, vol tends to get oversold.

If the VIX is down sharply again on Tuesday, it is going to be a buy.

VIX futures also fell sharply on Monday…if they continue to fall,  same deal,  they are probably oversold.

Holidays can be, when played right, some of the best times to buy premium. This market is setting us up for a real opportunity on Tuesday if VIX comes in soft.

I continue to look at the curve and think Jan is too high. I would be shorting Jan and buying December if things are soft.

Trade would be to buy Jan put spread and sell Dec, or Buy Dec calls.

Your Only Option,

Mark Sebastian