The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.

Hey Traders,

The S&P 500, as expected, did little to nothing on Monday’s shortened session.

But now that the 4th of July is over and regular trading hours are back (and the extra day off is over), what should traders be looking for?

Let’s start with the VIX – all things being equal, it’s going to be up on Wednesday. But remember, that was priced in.

Options were already anticipating all of this time off.

That is why the futures curve was pricing in a heavy contango on Friday:

With the extra days off gone, expect to see the July futures to cash spread tighten up, with the VIX rising and the futures sitting tight.

But that doesn’t mean there isn’t value out there.

Near dated options seem way too cheap…especially in the Dow Jones Industrial Average ETF (Ticker: DIA) …the Diamonds.

Look at the cost of the 344-345 strangle:

The ETF is pricing in a less than 2 dollar move over the next 3 days. It moved more than 5 bucks on Friday.

This strangle is entirely too cheap and should be bought.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian