The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move Wildly
Hey Traders,
On Monday the S&P 500 took it on the chin dropping 1.79% to 3998.84, breaking back below the 200 Day Moving Average.
The VIX for its part had a decent rally of 1.69 points to 20.75.
But the truth is nothing has changed…all the noise that has made this market seem aimless are still in effect.
However… that does not mean there’s no opportunity.
What if I told you that there was a trade that had edge in it that will make money if IV sinks or if VIX pops?
Cause there is one…
Check out the VIX curve:
With more than 2 weeks to go, VIX Dec futures are trading .80 points above the cash index…
At the same time, Januaures are trading at 3.50 points above the cash index.
Normally at this point, we should see Dec about 1-1.5 points above the cash, and Jan a touch less than 3.00.
Basically Dec is too cheap and Jan is too expensive.
So here is the two scenarios:
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VIX blows higher, long Dec pays while Jan underperforms on a rally.
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VIX drops and as Dec rolls off a lot of pressure gets put on the January future.
Thus the current play I see is to be long December options and short Jan with a slightly heavy lean short January.
Your Only Option,
Mark Sebastian