The Option Pit VIX Traffic Light is Red: Volatility is likely to drop.

Hey Traders, 

The VIX is at a new low since Thanksgiving.

Can it continue?

On a day where option flow was anemic and VVIX (VIX of VIX) fell a touch, I am watching this index closely.

It holds the key to a sub-15 VIX.

The VIX closed at 16.60.

That marks a new low since omicron revealed itself …

It’s also the lowest level since the week before Thanksgiving …

So, can VIX keep falling?

In short, yes, but it will take two things.

We will have to have the market sustain the rally from today.  

It doesn’t need to rally, but we cant have any 80-point down day hiccups either.

But the real key is skew, the cost of out-of-the-money options as they relate to at-the-money options.

The CBOE puts out a static index called SKEW Index that I like to look at every night.

Here is where it is now:

The fact that we are at 151.49 and VIX is 16.60 is something to take note of.

I would also note that the index has rolled off a touch, including Monday.

If the index keeps falling, that is a decent sign that we could see VIX continue to fall.

One of the things that has been holding up VIX is the cost of out-of-the-money puts.

If SKEW can get back to 140, with the S&P 500 (Ticker: SPX) not selling off, the VIX is going to tank.

So how would I play it?

Two ideas.

I love the Jan. 10-strike puts on ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY). I think they are too cheap.

I also like the VIX Jan. 17-strike puts. They are trading at parity with the VIX index; that is value.

I hope everyone had a great new year.

Your Only Option,

Mark Sebastian