Yo Pit Crazies,

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Mea Culpa- I thought the market selloff would give up the ghost just like every other time this last 6 months.  SPX has not had a 1.5% downday hold since March.  Thursday it did and once again my VIX9D>VIX delivered on a move.  This is what I said in my closing for the OP Newsletter yesterday:

“My VIX9day VIX30day indicator still delivered the goods  Stocks moved more than the implied vol said and VIX closed Wednesday on a high.  Will it keep it up?  My guess is not.”

The chart below says wrong, wrong, wrong.  Also, full disclosure I own a lot of SPDR S&P 500 Trust (Ticker: SPY) put spreads so the day on balance was a slight green, but just barely.  

VIX 5-day chart with 1 min candles

As you can see from the chart above, VIX rallies to close on a high. That is usually not good for SPX.  Mark and I added a curve flattener trade in the Trading Desk on Thursday.

Why did we do that? Here’s your answer…

Massive Flattening on the front end of the VIX curve signals big uncertainty

This is a snap near the close I posted for the Pit Stop.  The front end of the curve of IV is tipping up and that makes the VIX futures flatten.  Through observation for the last 10 years, I know that SPX is unstable in both directions when VIX is set up like this.

Also, if the SPX starts to calm down, which is possible given this curve, Oct futures will drop relative to the Nov VIX future.  The curve will steepen.

So Mark and I got short Oct via VIX put and long Nov via VIX call.  The story is not over yet and to be honest the curve flattened a bit more since I put the trade on.  From this point, if SPX sells off, VIX will rise and the VIX Nov call will ignite.  If SPX holds, the VIX Oct put will ignite.

Check in next week to see how it went and I will spell out the trade for all non-Trading Desk subscribers.