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

The S&P 500 closed below 3,800 and essentially melted lower all day.

The main reason being the reports of major redemptions at PIMCO.

You can actually see the news hitting in the chart of iShares 20 Plus Year Treasury Bond ETF (Ticker: TLT).

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The S&P 500 followed suit, albeit it more gradually throughout the day …

It’s notable that the S&P 500 dipped and recovered with TLT, but even as the bond market flattened out the S&P 500 trended down.

At the same time VIX took off.

So why is this so important: The answer is JPM.

They run a quarterly collar program that is currently long about 45,000 of the Dec. 30 3835 calls.

With the S&P 500 falling to 3783, those calls are producing long delta of the market to the tune of 1 million deltas.

On Thursday, when the market opens, there will be delta drift…

The delta of those options will decrease by about 250k deltas – about 5,000 futures contracts.

Now that is not just day trading deltas, those are positional deltas. The selling of that many futures will put pressure on the S&P 500 to move lower, which will lower the delta further.

This is a mechanical function that could actually be an additional tail wind to any selloff.

This could push the VIX to move,as well. (Although I would note, despite the selling, the VIX was not particularly strong.)

The curve remains in a deep contango…

We could see the VIX lagging SPX all week. Why? Because we have another long holiday weekend.

I would be long SPX puts and long VIX puts.

Mark Sebastian