The Option Pit VIX Traffic Light Is Red: Volatility is likely to decline.
Hey Traders,
On Thursday, the S&P 500 (Ticker: SPX) was up big … until it was not.
Throughout the day though, the VIX was bid.
You’ll recall I warned you this might happen.
What is important is that the SPX closed above 4,200.
On Wednesday, post-CPI, the SPX boomed higher …
On Thursday, post-PPI, the SPX also boomed higher …
Until it didn’t …
As the day progressed, the SPX slowly gave away all the gains, until it ended the day down less than 3 points …
VIX ended the day up by 0.46 closing at 20.20.
I told you … this happens A LOT.
This is why today is so important … I’ll explain why in a second.
Ahead of VIX expiration next Wednesday, there is a massive gap between the front-month future and cash:
With three trading days left, a spread of 1.25 is huge.
This is where Friday comes in.
If the VIX is down today and the futures start to converge, the August convergence play is going to pay.
This play is long 21-strike puts for about $0.60. One could sell the 20-strike puts at $0.20 to cut the cost down.
But if VIX is up … I would remove my August positions and wait until Monday.
No reason to take a short vol trade over the weekend unless the wind is at your back.
Your Only Option,
Mark Sebastian