The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.
Hey Traders,
The VIX closed at 13.89 on Tuesday. While this was technically up on the day, in the end it was actually down because of the weekend effect.
But, given the S&P 500 being down two days in a row, shouldn’t VIX be up?
Normally the answer would be yes.
But this is a unique circumstance.
Remember, the S&P 500 has basically ran straight up over the last month:
From the absolute top of the market on Friday we are off about 60 points.
That’s actually not very much. But I think what’s more important to the discussion is to look at the way the S&P 500 moved leading into Friday:
RELENTLESSLY higher.
This type of price action causes a few things:
- Shorts have to cover or buy calls
- FOMO crowd will buy calls
- Longs will sell stock and buy calls.
All of these cause the VIX to firm up the last few days of the rally. You will recall that on Thursday the S&P 500 was up big – and so was VIX.
This is the direct result of the three things I just listed.
With the SPX pulling back, that kills the reasons to buy options, instead of hedgers that have been burned sell puts.
That causes the VIX to sink.
So what do you do now? I think we could see more of what we have seen over the last few days – SPX falling and the VIX sitting around.
I would buy a bearish butterfly for the end of the month, and I would buy the July 13 puts in VIX.
Questions about that? Leave a comment below!
Your Only Option,
Mark Sebastian