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

The September VIX options expire this morning.

The settlement will probably land somewhere between 26.50 and 28.

This will make October the front-month future.

Let’s take a look at the close curve from Tuesday:

The September future closed below the cash yet again.

BUT!

Unlike some of the other prints we have seen recently, October is not trading at a sky-high premium.

This is 100% because of the FOMC meeting.

We saw for the first time on Tuesday a noticeable move in the front-end of the curve (sans September).

Traders are nervous and for the first time in months, the VIX is in danger of going full-on backward.

This will happen if the Fed raises rates by 1 point (which they likely will not do).

But the giant move in October is not to go unnoticed.

What is interesting, though, is that October is the one month where upside is not completely bid.

Yes, there is heavy open interest on the 50, 60, and 70 strike…but compared to November… it is nothing.

What is so special about November relative to October that it would have so much more upside?

How about the fact that after Wednesday there is not another meeting until Nov. 1 and 2. 

That means that October is completely going to trade on speculation.

This makes CPI a HUGE deal next month.

A decent CPI print in Oct could cause VIX to collapse on Fed slowdown speculation,  and the 185,000 open contracts on the 20 strike prove it.

I continue to say we are set for a grind lower, with vol not doing much. The open interest in Oct proves it. The lack of news is almost always bullish. Trade the market, but fade the VIX post Fed.

I would be a buyer of the VIX Oct.  23 puts for .50. They will double at some point.

Your Only Option,

Mark Sebastian