The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.
Hey Traders,
The big indexes all got smoked yesterday.
The S&P fell almost 1%, while the NDX and the Russell 2000 dropped closer to 2%.
Yet I’m darn bullish heading into Wednesday’s trading …
Why?
Take a look at how the VIX curve moved on Tuesday:
What are we seeing?
The purple curve is the VIX curve close on Monday …
The blue is the same thing for Tuesday …
What do you notice?
The curve did NOT move.
With a 30-point drop in the S&P 500, an essentially flat curve signifies a VIX yaaawn at the selloff.
You see, the VIX places more emphasis on at-the-money options than out-of-the-money options …
The VIX curve not moving on that selling essentially signals flat, or even declining, volatility …
Even if the VIX itself read slightly higher.
I have said for a long time that the VIX futures traders are the smart guys in the room.
If they are not buying up futures on a down move like today, what does that mean for the market?
There was little appetite for hedging as the S&P 500 dropped and the NDX and RUT got smoked.
I view today’s price action as bullish the S&P 500 and am looking for a move well above 3900 for the week.
And with that, I still think we could see a sub-20 VIX.
Your Only Option,
Mark Sebastian