The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move Wildly

Hey Traders,

The VIX got smoked on Tuesday falling 1.07 points to 21.29 on the heels of a nice rally in the S&P 500.

As I’ve stated previously, volatility continues to be high relative to the cost of options.

If you bought a straddle on Tuesday morning and sat on it … you are a happy camper.

But now that the VIX is this low, does this mean a bounce is coming? Eventually – but maybe not right away.

Yes, we will get the FOMC minutes today and those could cause havoc. Butthe VIX trend and the huge contango in VIX say it might be a whimper:

Now, that said, unless we continue to see the type of rally we saw Tuesday, vol futures are probably done selling off.

The spread between December and cash now sits at 1.66, a little light, but pretty normal.

January continues to be very bid.

I think we have seen the premium selling for the long weekend at this point. The easy money being short volatility is gone.

At this point it is time to take money from short vol in December and roll to January.

I continue to think that a long vol spx position could pay … as long as it is hedged with short VIX.

SPX realized vol actually ticked up on Tuesday:

While VIX tanked …

Given the 1.36% move higher in SPX,  VIX is more than fairly priced

I’m going to continue to buy strangles in SPX and short VIX via put options.

Your Only Option,

Mark Sebastian