Is The VIX Heading Toward A Post-Pandemic Low?

The Option Pit VIX Traffic Light is Yellow: Volatility Is Going To Move.

Hey Traders,

The S&P 500 (Ticker: SPX) had a nice 50 point range on Monday.

Enough to get the VIX to 20 … again …

Yet, we are seeing — and have seen over the last few weeks — a HUGE shift in trading …

So much so that it IS possible that the next time the S&P 500 gets a real rally, VIX might tank …

Here is what has changed…

Skew is the cost of out-of-the-money puts and calls, relative to at-the-money options.

It looks like this in the S&P 500:

As you can see, as we go lower in strikes (further left), implied volatility (IV) increases.

But how much IV goes up or down as we change strikes is something very important to watch.

Over the last 6 months, skew has been extremely high.

The CBOE posts a daily number called the skew index.

It measures crash protection puts …

Take a look at what has happened since September expiration:

 

The skew index is currently right near a six-month low, and below levels we have been trading at for most of the year.

One of the things that has kept the VIX stubbornly bid higher has been the presence of high skew.

Now that we are actually selling off a touch, the chickens have come home to roost, and traders are selling out of their protection.

If we rally, and traders take their time buying up that skew again, we could actually see the VIX finally fall.

These cheap out-of-the-money puts have NOT been profitable for the most part, so I wonder if traders will continue to go back to the well.

The speed with which they are dumping cheap puts tells me two things:

      1.  They don’t think this is THE sell off
      2. They want to cash in while they can.

So here is my prediction: the next time the S&P 500 gets over the 50-day moving average, the VIX is going to hit a new post pandemic low.

Buy the November 17-strike puts in VIX.

Your Only Option,

Mark

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