The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.

Hey Traders,

The VIX closed at 13.41 on Wednesday, near the lows for the year.

If the S&P 500 continues to rally – or even if it just kinda sits around without a sell off – the VIX is going to close below 13 this week.

Why? The combo of low movement and, more importantly, the weekend effect.

We’re heading into an incredibly slow week, and traders are already front running the potential lack of movement in options.

Thus, the VIX is 13.41.

As we head into the next 4 days, expect the weekend effect to come full boar and push the VIX lower.

But does that mean a trader can buy puts in UVXY or VXX and pocket some easy cash?

No.

Remember the VIX futures don’t have the weekend effect like the VIX itself. So they trade seamlessly and actually price in these types of moves ahead of time.

Take a look at the curve:

With July futures already below 15, they’re getting a little tight relative to the cash.

Why? Because they’re already pricing in the weekend effect in the VIX cash index.

While the futures could meander lower, the easy money being short the futures has mostly been played out.

So what do you do?

Here’s the good news – vol sellers almost ALWAYS get overly aggressive. But Friday, options on SPX and VIX are going to be overly depressed, potentially making them a buy.

I’m going to be looking to buy strangles in SPX and against it I will short UVXY.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian