The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.
Tuesday looked very ugly for a little bit.
- The VIX was over 21 — and zooming higher.
- Meanwhile, the S&P 500 was down 60.
- And VVIX — the volatility of VIX — was booming.
All that — yet no change in my Option Pit VIX Light — the proprietary indicator that guides my volatility trading.
It started to get close to a move, but never made the switch.
The reason why is important for almost all indicators that are supposed to sense a change in trend …
They should not be reactionary.
The VIX traffic light takes into account four sub-indicators:
- The VIX Curve
- VIX Correlation
- VIX Volatility
- Volatility of VIX options — the aforementioned VVIX
The traffic light would have 100% turned yellow if we had closed at mid-day
We had a flattened VIX curve, with the cash and the VIX May future pretty much on top of each other.
But by the close ….
That, friends, is contango — futures price higher than the spot price — and it’s a red light for VIX futures (the most important sub-indicator).
Also remember what a red light means …
- Red: The market is falling or staying stable. You can create a trading system and run your normal risk approaches. For instance, the light will be red during a contango market (that's when the forward price is higher than the spot price — not a lot of worry in the market!).
Now, elsewhere, we had the VVIX skyrocketing. I mean, look at the candle from Tuesday:
At the highs, the VVIX was showing a yellow, or even a green light (which, if that comes, buckle up.)
But where VVIX closed? Still red, although inching toward yellow.
VIX correlation was a little different. This is the one sub-indicator that actually turned yellow and has me on edge.
We are not seeing the VIX sell off much on rallies — but it is launching higher on selloffs.
Since April expiration, SPX is higher and so is the VIX:
If there’s one thing that is concerning — and I think points to the VIX being kind of stuck in a holding pattern — it’s VIX correlation.
I would also note that VIX volatility itself is picking up a touch from the lows, but it’s nowhere near breaking out yet:
Despite the selloff, at the end of the day, I had three reds and one yellow sub-indicator — that produces an overall red light (but one with a touch of an orange hue to it).
I am putting on a few small hedges here and there, but I am not putting on my major hedging programs.
I am also looking for spots to get short volatility.
Your Only Option,