The Option Pit VIX Traffic Light is Red: Volatility Could Fall Further.

Hey Traders,

Technically, the light went red on Thursday morning, but I do not like to switch things until after the close.

Why?

Because we have seen A LOT of VIX intraday turnarounds, along with the S&P 500 (Ticker: SPX).

But we are red now …

The last few times we have gotten to red, VIX has almost immediately perked up.

So what is the story this time?

Is VIX going to pop on Friday?

Here is what I see …

On a day the VIX got smoked …

The VIX index options actually showed some life, in terms of volume:

Calls traded above their average volume, puts traded almost TWICE their normal volume!

The ratio of puts to calls was 1.3 to 1.

So what does this mean?

Traders are positioning for the VIX to potentially fall further …

Remember, the SKEW index is no longer insanely bid.

The last time the VIX got low, look where SKEW was trading:

Skew was about 20 points higher than it closed yesterday …

That leaves the VIX more room to drop.

I think if we are able to stay green for a few days, we could see a new post-pandemic low for the VIX.

Now let’s look at the large block trades:

It’s all puts, along with some aspirational calls (the Nov. 75-strike calls) and one normal call purchase (the Jan. 25-strike calls).

There was a lot of buying of the Nov. 17-strike puts again.

Frankly, the Oct. 17-strike puts exploded higher yesterday as well (remember when I told you they were too cheap for $0.15?).

Obviously, we have a lot of uncertainty, but we seemed to have a shift on Thursday out of the chop from the last few weeks …

I am looking for more upside on Friday in SPX, and a potential sub-16 close for VIX.

Your Only Option,

Mark Sebastian