The Option Pit VIX Traffic Light is Yellow: Volatility Is Likely To Move Wildly.

Hey Traders,

The VIX light is yellow again, and could be on its way to red.

We have seen a dramatic change in the VIX over the last week …

And with earnings season closing up this week, we could see more fireworks.

The VIX futures curve is back in contango again:

While the middle of the curve is still flat, the front end has gotten significantly steeper.

That said, for the curve to fully normalize, VIX should be trading about 1.5-2 points below February. Right now it's 0.87.

To get there VIX is going to need to dip to 18-19, which SHOULD put the February future around 21.

This would be a dramatic drop …

But …

We are already in the middle of it.

Take a look at the move in the futures curve since only Thursday:

That is a pretty strong move, and we could see more.

I told you Tuesday that I thought the Feb. 21 puts for $0.80 were cheap.

They closed at $1.30 – an increase of 62.5% in a day!

The good news?

There are still cheap options out there …

I see value in February, going all the way out to June.

I think before this move lower is done, we are going to see a sub-18 VIX … potentially by Friday if the market rally continues.

So what option to buy?

Well, there are better options, but I do not think the 18-strike puts for $0.15-$0.20 are a bad purchase …

Your Only Option,

Mark Sebastian