Is Volatility Ready To Drop Or Not?!

The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To Drop 


Hey Traders,


The Option Pit VIX Light is red …


BARELY.


The market has been flat for a few days …


But VIX is now over 19!


What is going on?


The answer is that this emperor (the market) has very few clothes …


He is still wearing underwear and maybe socks, but no gown …


What do I mean by that?


What is actually going on?


Market breadth.


It measures how many stocks are going up and how many stocks are going down.


Positive market breadth is when there are more gainers than losers.


Negative is when there are more losers than gainers.


This is a chart of the NYSE breadth index:



Since the 16th, NYSE market breadth has been AWFUL.


The mega caps were up, but the rest of the market?


Down.


Monday’s breadth was actually better than Friday, but the mega caps took it on the chin.


So, the question is, what to do?


I think the Nasdaq 100 (Ticker: NDX) is heading for some pain.


But VIX might come off as well.


19.40 is WAY over-baked. Take a look at market realized vol (10-day is white, 20-day is light blue, 30-day is lavender, darker blue is 60-day):



Even 60-day historical vol is near 10.


The market is not moving, but money is flowing from sector to sector.


On Monday, we saw some serious order flow in VIX December options:



Traders are buying up the 15-strike puts …


As I said before, I think the 17-strike puts are a much better value. For that matter, so are the 16-strike puts, but I would still note the buying on the 15 strike.


Your Only Option,

Mark Sebastian

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