The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.

Hey Traders,

Monday’s trading brought the VIX back to life. Weekend adjusted, VIX is up about one point.

But should it be? 

The VIX at 17.06 would mean the S&P 500 (Ticker: SPX) is moving more than 1% a day …

But SPX has been doing just the opposite of moving 1% a day … movement isn’t even increasing!

Here is what I mean, and what I am trading …

The VIX is currently around 17.

A VIX of 15.67 would mean that it is anticipating the SPX moving about 1% a day.

So 17, believe or not, is a pretty juicy VIX.

With VIX at 17, I would anticipate seeing S&P 500 movement (realized volatility) increasing.

But it isn’t …

Check out 10-day (white line) and 20-day (blue line) realized volatility on the SPX:

The 10-day movement is now at levels that represent the absolute lows the SPX will hit.

The 20-day (the blue line) is actually sinking.

Today’s 0.5% move is not going to move the needle.

Something has to give here. Either the VIX is going to back off further, or we are due for a real uptick in SPX volatility.

My gut says it’s the former.

With August expiration two days away, we could easily see VIX back off, especially if the SPX recovers today or tomorrow.

The August 16-strike puts that expire Wednesday are $0.05. This is a really inexpensive flier on the VIX being overpriced … I would be a buyer.

Your Only Option,

Mark Sebastian