The VIX Light Is Yellow:  Volatility Is Going To Swing Wildly.

Hey Traders,

On Friday, my VIX light moved from red to yellow.

Does this mean VIX is going to shoot up to 30?  

No, it doesn’t mean that at all.

Now, like I said, the Option Pit VIX light switched from red to yellow on Friday.

Let’s take a look at why this happened.

It was not because of the VIX curve …

The VIX curve stayed in a contango (futures prices trading higher than spot price) on Friday:

Although the curve has flattened up a bit, clearly the VIX is still in a contango.

VIX correlation has also remained pretty steady.

What flipped the light was actually my two secondary indicators: VIX volatility and the VVIX.

Check out VIX movement:

Since bottoming, VIX movement has been steadily increasing, and is now back over 100%.

VVIX, which indicates the volatility of VIX options, has also had a nice rally:

Since touching 100, VVIX is back above 125, which is its highest level in over a month.

So what does this mean?

A yellow light means we are going to see movement, but it could be either up OR down.

With VIX futures still in a contango, my feelings are that it is likely to drop back down, not rally higher, as I stated last week.

Friday ended up being an excellent time to cherry-pick some short volatility trades.

I think this could have been a little shake out to finally let more air out of the VIX index.

I expect to be back to red tonight, and potentially see the VIX hit 15 by July 2nd. 

Your Only Option,

Mark Sebastian