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

The S&P 500 closed up 56.54 points yesterday while the VIX got smoked, falling .85 points to 19.12

Interestingly, the RUT was the weakest of the indexes, rallying only .97%.

So what gives? Wednesday seemed risk-on?

Was it?

XLF only rallied .46 points.

KRE had a better day, but was still only up 1.07%

Energy underperformed tech but managed up 1.12%

What is interesting is the VIX. I told you yesterday there was room for the VIX to drop because the spread between cash and future was not stretched. Look at it now…

It stretched further and now sits at 1.77 points.

That means there are about .25 points before the relationship starts to be stretched. (A spread between cash and VIX over 2 is stretched.)

If we hit that, either VIX futures need to drop fast or VIX is going up. Historically the curve has been right.

So what is the battle plan?

We have a run to 4050 (probably) on this rally. At that point decisions will be made and they will probably be the market moving lower.

I’m going long SPX strangles and buying VIX puts.

Questions about that? Comment below!

Your Only Option,

Mark Sebastian