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

On Monday the S&P 500 closed up 1.19% – or 47.20 points – at 4019.81.

The VIX dropped .04 points, closing at 19.81.

If that seems like a small drop given the rally, well, there are reasons.

For starters, you could throw in a little bit of weekend effect in the equation. Although, we really didn’t see much of a vol selloff on Friday.

A bigger factor for the VIX not selling off is this: 

Option prices on the SPX are too cheap again.

Movement is actually increasing as vol has dropped a touch.

That will not last.

Near term, I think the best play is to buy short-dated strangles on the SPX, something that expires before the end of the month.

Against it, I would be buying VIX 20 puts,  which also are inexpensive as the spread between cash and the February future is too tight given the time to expiration:

February should be trading about 1.5 points above cash at this point, but it’s less than a point.

So, puts make sense as VIX could drop or pop here given its proximity to the curve.

On a pop, you win on the strangle. On a drop, the VIX wins.

Your Only Option,

Mark Sebastian