The Option Pit VIX Traffic Light Is Green: Volatility is likely to stay high.

For several weeks I have been explaining why the S&P 500 could drop 2% and the VIX could be sluggish.

The S&P 500 would drop 2%, but the VIX was already pricing that in.

Something has changed, though.

While not exactly the VIX, the Livevol Blended S&P 500 30-day Implied Volatility is a pretty good proxy.

On Tuesday, 20-day realized vol popped over that number:

When overlaying this with the S&P 500, since the sell off began in August we have seen movement outpace vol only twice:

While way too small a sample size to be considered real data,  it is worth noting that these instances have been when the market has topped on a short squeeze.

Now we are in earnings season, which could change things …

But what I will say is that given the current pattern of VIX, the structure of VIX futures, this might be a real opportunity to go long volatility.

A trader could do it with a long at-the-money SPX iron butterfly,  with a VIX put matched with an SPX put.

Questions about that? Email my Customer Care Team with the subject line Iron Butterfly.

Your Only Option,

Mark Sebastian