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

Hey Traders,

On Monday the VIX rallied a full 1.51 points.

I saw across the #Fintwit universe pundits pointing out that VIX was strong.

But here is the thing … It was not that strong.

Yes, VIX was up …

But technically only a little.

Remember, adjusting for the weekend, the VIX should pick up close to a point on Monday.

Adjusting for the weekend, the VIX was up about 0.60-0.70 of a point.

That said, Monday was a VERY inside day.

An inside day is when the market does not move very much after several days of big moves.

So the VIX being up is in fact meaningful.

The bigger piece, though, was the VIX futures.

Unlike VIX, VIX futures do not have a “weekend effect” in them.

Monday was a meaningful move higher in the VIX futures curve:

There are several reasons for this.

One: we were down after a CRAZY rally in July.

Two: we have a whole host of economic data on tap.

Three: rates … They are starting to move again.

The third point is the most important point.

If rates start to rise, the market is GOING to fall and VIX is going to rally.

It could be a one-off thing.  I still think we have a legitimate shot at a sub-20 VIX this week.

But it is worth noting.

I used Monday as a day to pare back short volatility positions heavily in the green and add cheaper out-of-the-money plays that can really clean up if VIX falls.

At the same time, now is not the time to just be flat naked short vol, stay hedged.

Your Only Option,

Mark Sebastian