A Hint of Yellow?

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Hey Traders,

Mid-morning yesterday the Option Pit VIX Light — the indicator I developed to help me decide when to hedge — began to flicker yellow.

Three of the four inputs were saying, “If things stay like this we are going yellow.”

But as  the day wore on and a huge sell off failed to materialize some of my indicators turned back to red.

Here is what I saw:

Indicator 1: VIX Curve

My biggest indicator — the VIX curve never started to move into the yellow zone, remaining in contango (future price higher than the spot price), which is a sign of relatively smooth sailing

All day, the VIX curve stayed fairly stable and ended looking like this:

VIX contango remained in place all day, but at least was a touch bid early on, though that waned.

On the week, the May future is up less than two points from Friday’s close.

Now that I covered what stayed green,  here is what looked yellow for a bit.

Indicator 2: VIX Correlation

In the morning,  the VIX was bid far more than the S&P 500 was actually down — this means the VIX was up more than it should be relative to the selloff.

That lack of correlation is a yellow light.

But by the end of the day, VIX was only up about 1.30 after being up barely more than a point yesterday.

That is not going to change the light’s color.

Indicator 3: VIX Volatility (VVIX)

The VIX of VIX — the VVIX — is on a really nice upward trajectory:

VVIX is at a high for the month … and that is a yellow signal in this indicator.

But two reds and a yellow keep the overall light red.


So it’s on to the last input..

Indicator 4: VIX Realized Volatility

The final indicator I look at is VIX realized vol … which is also ticking higher:

But 10-day historical volatility has not ticked above 20-day HV on an upward move — which would trigger this indicator to turn yellow.

So No. 4 stays red, as well.

Wrap It Up

So I have three red lights and one yellow light, which means the Option Pit VIX Light Is Red.

If we see another morning like Tuesday — and the movement sticks though — we will turn yellow … and we are pretty close to going that way.

BUT the VIX light is designed to be a touch slower, because VIX swells (when the VIX slowly cascades higher before booming) take some time to form.

We need more out of this market than what we got on Tuesday.

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Your Only Option,

Mark Sebastian

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