The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.
Hey Traders,
Heading into Tuesday, everything in the market looked great for a serious drop in volatility …
But then things started to change …
The market is acting nervous.
I am starting to see some little things in my indicator that say the market is not 100% happy …
What am I seeing?
Check this out …
Monday marked the second day in a row the VIX closed below 17 …
We had not seen three closes below in a row since the start of the pandemic …
I thought we had a real chance for that to change on Tuesday …
But, on Tuesday we closed at exactly 17.
Now, we’re another day forward, and a few things have changed …
There are a couple of things that make me wonder if maybe we really are going to see S&P 500 (Ticker: SPX) 4250 this week.
Let’s start with correlation.
Take a look at the VIX and the SPX:
SPX is barely off the highs from Friday …
But the VIX has jumped over 1.5 points.
Traders are buying protection, and that can mean a near-term top.
Now look at VVIX, the VIX of VIX options:
After being pretty dormant for the last two weeks, VVIX suddenly exploded higher …
What does that mean?
Traders were buying options.
The good news? Most of the demand was still for July puts.
The bad news? There were some decent call purchases snuck in there …
Traders bought over 55,000 June 20-strike calls!
What I am seeing still gives me a red light, but it is NOT as bright red as it was …
My take, I think we are dealing with memes and a BIG Consumer Price Index (CPI) number coming …
However, I still think it flushes out …
That said, I don’t think taking profits on winners right now is a bad idea.
I am long a lot of puts, and will be looking to pair winners.
Your Only Option,
Mark Sebastian