Below is a three-month chart of the January Futures contract:
I circled the spot where December rolled off and January became the front month (the month of the nearest expiration date) future:
Notice what happened to the contract over the next three days …
It died and went close to contract lows.
The EXACT same thing happened when November rolled off to December:
When November rolled off, December spent the next 6 days heading to contract lows.
Now, take a look at the spread between the VIX cash and the February futures contract:
There is a 2.70 point spread.
Knowing what we know about the prior two months, what do you think is about to happen?
That’s right. The Feb contract is heading for new contract lows in the coming days …
Making the Trade
I now have some GREAT opportunities to get short Feb using options.
On Wednesday in Volatility Edge, I put out a trade that I’m confident is going to return 50% in only a couple of days …
I bought the Feb 23 puts and sold the 19 puts. I paid 1.71, which is where the spread closed.
If I am right (and I usually am!), the Feb contract is going to be heading from its current level near 25 to 23 or so.
Based on the trends of the last few expiration roll overs the VIX itself is probably going to touch recent lows or lower.
This presents me with an opportunity over the next couple of days to set up a short play similar to the one I put on Wednesday.
With the spread as wide as it is, I decided it was worth jumping in a little early (yesterday, as opposed to next Tuesday).
Reason being, these spreads tend to tighten when they are as wide as they were Wednesday.
Often I think the VIX will run up to the future, but in this case, I think the opposite is likely to happen. Because, as I have said many times, Vol traders (those that trade the VIX futures) are smarter than equity traders (those that trade SPX options from which the VIX is derived).
Because Jan is not trading at a similar premium to VIX cash relative to Feb. (if Jan was trading north of a point of VIX, I would be concerned).
If January was trading over a point higher, I would be less confident about my prediction that February is overpriced.
So, Feb looks like a huge and profitable sale!
The VIX Light is Red, meaning the VIX is likely to fall.
Your Only Option,
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