How I’m Making This Judgement Call

The Option Pit VIX Light is Yellow, Volatility will move.


Hey Traders,


On Tuesday night I wrote that we had better than 50/50 odds that we could see a VIX green light.


Then Wednesday happened, and markets got smashed …


The VIX ended the day up 5.75 points, closing at 27.67…


Bonds… normally a safe haven … were DOWN …


So, with all that in mind, are we going to see the VIX light turn green?


Here is your answer …


Wednesday was a bit of a bloodbath …


The S&P 500 dropped more than 2%, the NDX dropped almost 2.5% …


BONDS WERE DOWN with equities.


What was NOT down was the VIX … The VIX rallied 5.75 points to 27.67, a huge move.


Crazier, the VIX futures moved about as much as the VIX itself … May jumped 3 points … June jumped 2.2 points …


Huge moves …


The reason for the move is that when bonds are down and stocks are down, volatility is the only safe haven around.  


So smart money bid up the VIX (which, remember, is based on the volatility of SPX options), and VIX futures.


So does this put us to a green light on the VIX?


Almost.


We are essentially there …


The SPX/VIX correlation indicator was the 1st light to go green. (We talked about this last Thursday, when I switched the light to yellow.)


VVIX exploded higher on Wednesday, ending the day 146.28 up 23.81 points …



VVIX is at a green light.


VIX realized volatility has kicked up significantly:



VIX volatility is a yellow light.


The thing stopping the light from going full green is the VIX futures curve.


While we are in partial backwardation, the curve itself — even May futures which expire in a week — remained in a pretty steep contango:



For the contango indicator, my most important indicator, to turn green I would at least need May to get over June … and that just doesn’t seem to be happening!


So are we at a green light? 


No, but we are 90% of the way there …


With 2 yellow and 2 green indicators, I have a judgement call. So I am going to wait one day to see if things stay the same, or get worse.


But unlike normal, the light can turn green mid-day because it is THAT close …


It makes a lot of sense to have hedges on, as I stated yesterday.


The May 25-40 call spread I suggested certainly paid out …


The 30-40 call spread only costs a dollar … that’s a cheap hedge.


The VIX light is staying yellow,  but will likely be green on Friday if things do not change.


Your Only Option,


Mark Sebastian

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