The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move.
Hey Traders,
On Tuesday, the S&P 500 (Ticker: SPX) rallied 105 points, and on Wednesday, the S&P 500 closed up 23 points.
But … underneath the surface level “falling VIX,” there is something you need to know …
VIX is wrong.
The VIX closed below 24 for the 1st time in months.
So volatility is coming down …
Or is it?
One thing about the VIX: there is more than meets the eye.
It is a complex calculation, and it can be wrong.
Right now, VIX is wrong.
Volatility is not dropping.
In fact, S&P 500 options are getting more expensive.
Here are the 4,000 calls from Monday.
Notice the implied volatility (IV)
:
It is 19.50.
Here is the IV on the same strike from Tuesday’s close after the market’s strong run higher:
The VIX went down, but STRIKE volatility went UP!
Wednesday saw the same thing:
That’s right. While the VIX has been falling, the August 4,000-strike calls have seen the IV increase by 1.75 points.
This is where the VIX can be tricky.
In a market where vol is going up with the market …
Rallies die quickly.
I would sell long puts Thursday or Friday at the latest, and then look to go long VIX options, especially with VVIX (VIX of VIX) trading at 86.75.
Your Only Option,
Mark Sebastian