Flow Tells the Story

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop


Hey Traders,


The VIX closed at 18.71 on Thursday, up 1.21 points from the previous finish — and even briefly traded above 19.


You would think that, with the top capital gains rate potentially doubling, traders would be worried.


And given the VIX rally, I was expecting to see a lot of call trading …


But take a look at the option volumes in May (the green numbers):



Between the 15 and 30 strike — the strikes that could actually come into play — there was not a single call strike that had five figures


At the same time, three strikes had more than 10,000 in the puts, including a buy of 20,000 May 17 puts.


What does this mean?


It means that traders were fading the move. (Fading, you’ll recall, is buying or selling the opposite direction of a price movement.)


Take a look at the price action of VIX futures below.


The purple line is Tuesday’s close, the blue is Thursday’s …


Remember, the S&P 500 is basically unchanged over that time period (but saw two 38-point move days).



Near-dated futures actually closed lower today than they did on Tuesday. The curve is basically unchanged, meanwhile, but the futures are lower having slid down the curve.


So Thursday feels like a one-off event.


Markets will gather themselves and press on, if not today, then probably Tuesday of next week.


VIX paper sees the index more likely to be below 17 than above 20 anytime soon — the option volume clearly says so.


Yesterday in Volatility Edge we bought the May 15 puts, and I was bidding .05 for more.


And I would LOVE to buy those for a .05, but more proof they (big money) wasn’t buying the selloff — I couldn’t get filled!


The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop


Your Only Option


Mark Sebastian


PS – Don’t forget that the VXX reverse splits 4-for-1 today, so no need to be alarmed when it’s trading 40.

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