The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move Wildly
The S&P 500 sold off on Monday, dropping as much as 50 points at one time.
The NDX and RUT had it even worse falling 1.42 and 1.27 percent respectively…
Yet the VIX…fell..
While it closed off its lows of down over a point, it still closed down on the day.
Given we are coming off a weekend, the VIX should have been up about .7 all other things being equal.
On a down day, like Monday, we would expect more…
So what happened?
Christmas.
Traders tried to price the entire holiday season out of the market in a single day…
The S&P 500 was having none of that as it began to sell off.
That caused some of the premium shorts to come in and buy and also may have sparked some option buying from market makers.
You see when VIX is down 1 point, with the S&P 500 down 50 and a full week before the holiday season starts…a savvy market maker is going to see the premiums .
You can almost see volatility getting oversold mid day…
Now that is not to say that we won’t go back there…but the retail/bd crowd may have gotten ahead of themselves.
The curve itself also tried to steepen, stretching to over 3 points before settling back in at less than 2.
SO…how do you trade this?
The same way as the BDs…but smarter.
When you see an inside day (a slow day), short UVIX or UVXY and then buy it back mid-day instead of being forced to cover.
Your Only Option,
Mark Sebastian