The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To Be Stable or Drop.
Hi Traders,
The VIX stubbornly refuses to drop below 20 … though even with markets down to start the week, we saw the VIX gradually come off throughout the day.
Like we discussed last week, Monday is historically the one day where VIX is higher, thanks to the Weekend Effect.
On Thursday, the VIX closed at 22.70, and it opened on Monday at 24.52 … a little higher than the full one point pop I said we should expect to see …
Of course, now we are dropping like a rock as we near VIX expiration tomorrow morning.
The VIX futures curve is in a strong contango, with the front-month future trading only slightly over spot VIX …
Given how close we are to expiration, this small spread is not surprising.
If VIX continues to drop, we can expect to see the future drop in step, since although VIX expiration is technically tomorrow morning, the futures actually stop trading today …
While it is not impossible, it is looking rather unlikely we will see VIX break below the 20-level ahead of expiration …
But the VIX is still overvalued … according to the actual volatility in the S&P 500 (Ticker: SPX).
I said on Thursday that with realized vol in the SPX at around 16, the VIX should at most be sitting at 18 or 19 …
And now realized vol has dropped even more, sitting in the 15’s …
What does this mean?
With the market moving higher so far today … I would not be surprised to see VIX continue to fall into expiration, and beyond …
We may see a sub-20 VIX yet …
Your Only Option,
Mark Sebastian