The Option Pit VIX Traffic Light Is Red: Volatility is likely to be stable or drop.

Hey Traders,

On Tuesday, the S&P 500 (Ticker: SPX) sold off 27 points, or less than 1%.

Meanwhile, VIX rallied 1.09 points, back above 23.

It is now back to pricing in 1.5% movement every day.

The VIX futures also showed some life, rallying for the second straight day:

While we are still in a contango, the curve is showing signs of life and is back above 24 and making a run at 25 in August.

But here is what really had me thinking: the activity on the 23-strike and 22-strike puts:

There is pretty big long open interest on the 23-strike in particular.

Tuesday saw pretty big volume on the 23s and the 22s …

Institutional traders were selling puts …

In other words: smart money was buying these puts last week for $0.40 and today they were unloading them at $0.82 or higher …

Why? 

Because they think the easy money has been made, and the potential for the market to run right back around has developed.

July was great for short vol. August so far? Not so much …

While I still like short vol, I would take profits and look to hedge.

Your Only Option,

Mark Sebastian