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

Hey Traders,

After Thursday’s market rally, it really looked as though the Option Pit VIX Traffic Light could be about to turn to red … indicating volatility is going to fall.

Multiple indicators are pointing to a red light …

First, we have VVIX, the VIX of VIX, which continues to fall …

In fact, it is the lowest we have seen since the start of the pandemic.

Even with markets down and VIX up on Friday, VVIX is down.

This tells us VIX options are cheap …

Traders are not pricing in a huge, unexpected move in vol …

Add to that, VIX futures are still in contango, with futures trading progressively higher over spot:

Again, this tells us that traders are more worried about volatility further out than they are about volatility right NOW.

But there is the small problem of the S&P 500 (Ticker: SPX) on Friday …

As of right now, SPX is down 1.5% …

And VIX is up just over half of a point …

If the SPX manages to close higher on Friday – a tall order as of right now – then I would turn the Option Pit VIX Traffic Light to red …

However, as it stands …

The VIX may actually be nearing a bottom … 

Could we be getting ready to see vol rebound higher?

We will have to wait and see …

Your Only Option,

Mark Sebastian