A Cheap, In-The-Money Vol Trade

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

The VIX closed below 17 for the first time since November 16th.

The VIX puts for January I have been imploring my readers to buy are up north of 100%.

Now we head into the last two trading days of the year …

Could we see the market tank one more time just to ring in the New Year? 

Yes, we could …

But I do not think that is in the cards.

For a second there, at the end of the day, Wednesday’s close looked like it could be off to the races.

But the algo’s sold S&P 500 (Ticker: SPX) over 4,800 …

Will they continue to do so?

Is the VIX heading to 19 again?

Probably not.

Why?

Bond vol.

Take a look at CBOE 20+ Year Treasury Bond ETF Volatility Index (Ticker: VXTLT), the VIX of iShares 20+ Year Treasury Bond ETF (Ticker: TLT):

While still high relative to some of the lows we can see, the index has been on a one-way trip down.

To make matters more certain, the VIX of VIX, VVIX, continues to get crushed:

While still higher than the lows we saw in October, it is clearly showing a pattern of volatility demand decreasing.

This means traders are buying fewer VIX call options.

If bond demand is down, and vol demand is down, that is pretty bearish for volatility.

Could we still see a one day sell off?

Sure. 

But are we set for an extended period of high vol?

Not right now.

Open interest in January leans HEAVILY toward putting in options that have a decent chance of ending up in the money …

There is a reason for that. The 17 puts for $0.25 are cheap, and currently in the money …

I am a buyer.

Your Only Option,

Mark Sebastian

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