Looking At High Lows

The Option Pit VIX Light Is Red, And Volatility Will Drop.

Hey Traders,

With the VIX hitting a new post-pandemic low on Friday, one might be thinking that it might be time to go long in volatility.

It makes some sense right?

Market is at an all-time high, the VIX is right near its lows …

Why not???

Here is why you should think again.

Like I said, on Friday, the VIX closed at a new post-pandemic low.

It actually closed in the 15’s before getting a little bit of a boost on Monday.

So, with that in mind, is it time to go long?

I have two reasons to think that despite the current ‘low VIX’  it is likely to keep going lower.

Let’s start with this chart:

This is a five year chart of the VIX. What I want you to notice is that outside of the last year, the level we are trading at currently — about 16 — would actually be considered quite high!

Yes, we had a few spikes prior to the pandemic, but for the most part, the VIX is often below 15.

Now I want you to feast your eyes on July puts …

With the July VIX future at 19.15, take a look at the open interest on put options between the 15-21 strikes:

In a six strike range, we have about 1,000,000 contracts open.

These are going to see significant drift in the coming days. Traders are long on these, and the market makers are short …

This is going to put real pressure on volatility.

I would be long in the July 17-strike puts for $1.20, and sell the 14.5 or 14-strike puts against them.

Your Only Option

Mark Sebastian

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