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

Hey Traders,

On Monday, the VIX was up 0.67 points from it’s Friday close by the end of the day.  

At the same time, long VIX calls were losing money …

What gives?

Is it just theta (time decay)?  

Or is there something more sinister at work here?

Here is the answer.

While trading over 17 for much of the morning yesterday …

In the end, the VIX, in spite of the market being up, managed to hold a gain of 0.67 points.

Not exactly a giant move higher …

In fact, when adjusted for the weekend effect, it actually barely closed higher on Monday.

So one would think that being long calls worked on Monday …

VIX was up, the VVIX (the VIX of the VIX) index was flat, meaning long calls didn’t lose any money on implied volatility dropping …

Yes, there was some theta I guess, but it’s not like the $0.20 18-strike calls would have much to lose …

But, the 18s DIDN’T make money …

The 17’s didn’t make money either …

Heck the 16 calls were FLAT!!!!

VIX was up!

VIX options are not about the cash VIX.

They are about the VIX futures.

Take a look at what the VIX futures curve did from Friday’s close (pink) to Monday’s close (blue):

The August future was flat, and the September future was lower!

The thing to remember, especially as we get closer to expiration, and September is trading at a massive premium …

The VIX doesn’t matter, the movement in the futures do.

Also …

On another note …

The August 16-strike puts seem cheap …

Your Only Option,

Mark Sebastian