My November VIX Trade

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

Wednesday morning October VIX futures expire.

As we head into November there is a huge question: is VIX going to 12 …

Or back to 20?

The VIX has been stubbornly above 15 for 19 months now.

Believe it or not, Tuesday’s close of 15.70 was fourth lowest close since the pandemic began:

But this time it is different.

Why?

Skew.

The cost of out-of-the-money puts continues to be a LOT lower than it was the last time the VIX got this low.

Take a look at this chart of the CBOE SKEW index:

In June and July when VIX got low, it was because the market was going up.

The natural construction of the index was driving it lower.

Now, on top of the natural construction of the index, options themselves are getting cheaper.

The next time the S&P 500 gets to a new high, we are going to be dealing with a very different VIX …

One that wants to go lower, because puts are not overly-bid.

Why is this happening?

Because hedging hasn’t worked.

When hedging stops working, the big money tends to get a little lazy, bored, and impatient.

They move on.

This is what is going to allow the VIX to go lower..

Now, with the VIX November future as expensive as it is …

The current 4-point premium of November futures over cash could quickly diminish to the normal 2-3 points.

The trade? I am a buyer of the November 17-strike puts.

Your Only Option,

Mark Sebastian

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