The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.
Hey Traders,
The VIX is back above 15, closing at 15.44 – makes sense. The low of the day for the S&P 500 was down over 60 points.
This is not what a 13 or 14 VIX is pricing in.
While the S&P 500 managed to rally back down only 35 points, VIX, well off its lows, showed some teeth on Thursday.
The index closed at 15.44, and the VIX futures curve dramatically flattened up:
The July future is now trading less than .80 points above the cash index.
This is pretty tight, given the futures expire in less than 2 weeks.
For those new to futures and the VIX – when the curve is tight, that means that traders think VIX has the potential to move higher in the near term but are not believers in an extended pop.
This means VIX is telling us SPX is going to move.
In a 0DTE options world, though, that doesn’t always translate into high SPX option prices.
SPX options remain incredibly cheap relative to how much SPX is moving. This is part of the reason why I think we are going to see a gamma bomb.
A gamma bomb is when too many traders see a VIX move higher and unload premium in SPX, unsuspecting of the fact that SPX can move more than 2% in a day.
When SPX makes that BIG move, a move we have not seen yet, all those 0DTE option sellers get run over, and the index dumps as these traders cover.
Now, I don’t know the exact date this thing is going to go off, but I do know it’s coming.
SO, what do I do?
I look at oversold SPX straddles and buy them because we are already getting termours like we got on thursday.
Take a look at options that expire a week from Friday:
SPX options have a volatility of 10!
The total cost for the straddle is about 68 bucks. Look at the 50 point move we had on Friday and the 60 point range from Thursday, and tell me you think SPX can’t move 68 points …
I am a huge buyer with a vol hedge.
What exactly am I going to do? You should join the Trading Desk to find out …
Questions about that? Leave a comment below!
Your Only Option,
Mark Sebastian