The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move Wildly

The VIX took it on the chin on Friday.

When the market has an “inside day” – a day where it doesn’t move very much – traders come for volatility.

VIX fell 1.10 points, landing at 20.87.

Today, there is certain to be some weekend effect that causes VIX to be up in the morning.

But Friday might be a glimpse into what the final week of the year will look like …

After continuous movement for months and months, it is entirely possible that 2022 goes out with a whimper.

The VIX curve is in a steep contango, with futures higher than the spot price, and  it will tighten up on Tuesday to be a normal two points, 

As the week progresses, expect the curve to widen out again. Tes VIX futures will likely fall, but do not expect the January future to drop much below 23.

This will cause UVIX, UVXY, and VXX to kind of slowly melt,  but it will not be the big vol drop that many traders will be looking for with the VIX off.

The S&P 500 is likely to meander higher and we could see a full week of inside days.

That will change when the new year starts, but this week could be slow.

So here is the play …

I think traders want to play SPX from the long side, and if VIX gets a pop they can hedge SPX with some VIX calls.

VVIX is dirt cheap its at multi-year lows:

With VIX relatively cheap, SPX options are cheap, and the hedge options – VIX calls – are even cheaper.

Your Only Option,

Mark Sebastian