Back To Business As Usual?

The Option Pit VIX Traffic Light Is Red: Volatility Will Drop.

Hey Traders,

After a rocky first half of the week, things look like they may be getting back to “normal” today.

Dovish statements out of the Federal Reserve are helping give markets a boost, and the S&P 500 (Ticker: SPX) has almost completely recovered its losses on the week.

It is of very little surprise that the VIX is also moving, and we are now back below 20 …

I think we will see it go lower still …

Here is what I am watching, and how I am trading …

Finding The Pattern

It took a few days, but it does seem that the post-expiration drop-and-recovery pattern we’ve been seeing the last few months is now coming to fruition.

Yes, it was a little more dramatic of a drop than we usually see … and a little longer-lived …

But the SPX looks like it is ready to resume its trajectory higher:

The VIX, in turn, is dropping back to its pre-September-expiration levels, and it is sitting back down near where it was trading most of last week:

Yesterday I mentioned that the VIX curve was back to a contango.

However, October futures and VIX spot were still sitting unusually close, keeping the Option Pit VIX Traffic Light yellow.

If the FOMC meeting had yielded the opposite result, I think we would be seeing the VIX moving in the opposite direction today.

As it stands, the VIX is lower on the day, and the VIX futures curve is back to normal:

That is about a 1.9 point difference between October VIX futures and current VIX spot price.

And overall futures are back to showing a steady contango pattern, with futures increasingly higher than spot VIX.

Now, of course, we could always get another breaking news story that shakes the whole market up, like we did on Monday …

But barring any aberrations, I expect to see the VIX continue to head lower.

And of course, that means futures will also be pulled lower.

I am a buyer of the ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) October 20-strike puts, which were trading for around $1.37 during today’s session.

Your Only Option,

Mark Sebastian


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