The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to swing wildly

Heading into today’s quadruple witching, the market had a nice late-day sell-off on Thursday.

The S&P 500 at one point was down 1.5% and closed right on top of 3900.

The next stop might be 3750.

But VIX … seems like it stuck in place.

Despite the selling in SPX, VIX only rallied .11 points.

What gives?

Why can't VIX get off the mat?

This is a MAJOR misconception … because the VIX is ALREADY off the mat.

The VIX closed 26.27, this implied a daily move in the S&P 500 of 1.65%…

Even at the lows on Thursday, the S&P 500 did not move that much.

And then there is this problem:

… positioning.

Credit funds and money managers are long so much ridiculous upside in the VIX options,  we are not going to pop just on standard market selling.

What do I mean by that?

Here are some huge strikes the street is long that are WAY out of  the money:

– December 70’s 140,000

– Jan 70’s 110,000

– Feb 75’s 101,000

– March 75’s 200,000

– May 90’s 100,000

All told, in strikes ABOVE 50, hedgers are long calls into the millions …

With this kind of positioning, we are not going to see a huge volatility chase.

The key here is to play VIX to maybe make a run at 32 or 35 in a sell off – and that is it.

And when we rally, the speed at which it will deflate might shock some people.

Your Only Option,

Mark Sebastian