One Warning Light Flashing Yellow

Hey Traders,

The S&P 500 (Ticker: SPX) tried to scare everyone on Thursday, only to end the day down a measly 15 points.

I think the SPX is probably going to have a nice rebound on Friday …

Of course, I could be wrong, because there is still one indicator saying “look out!”

What am I seeing?

On Thursday the VIX closed at 17.01; not high, but certainly well off the lows from last week.

So where is it headed to next?

VIX curve would say lower, because we are in a nice, steep contango (when futures are trading higher than spot price):

I continue to think (as I stated yesterday) that there is a real risk of the VIX falling apart and ending up with a sub-16 or even sub-15 settle in the next few days.

However … if I am wrong I do have a warning.

Three of my four indicators are saying the VIX is red (the VIX curve, VIX correlation with the S&P 500, and VIX realized vol).

But one is signaling the VIX is in the yellow: CBOE VIX Volatility Index (Ticker: VVIX), the VIX of the VIX.

Check out the price action of VVIX:

VVIX is now over 120 and appears to be heading nearly straight up!

So if it turns out I am wrong, and the VIX actually blows up, this is the warning sign …

Do I think VVIX, one of my secondary VIX Light indicators, is right?

No, I don’t.

But I am not perfect.

Here is the key …

When one of my other indicators is tripped and starts to tell me the VIX is going higher, I know exactly what to do …

But for now I am going to continue leaning short.

Your Only Option,

Mark Sebastian

Mark Sebastian

Mark Sebastian

Mark Sebastian is a former member of both the Chicago Board Options Exchange (CBOE) and the American Stock Exchange (AMEX), where he spent years mastering the art of options trading in the most competitive environment imaginable. As Chief Investment Officer at the hedge fund Karman Line Capital, Mark manages sophisticated options strategies for institutional clients. He is the author of two highly regarded books on options trading: ‘The Option Traders Hedge Fund’ and ‘Trading Options for Edge.’ Mark is a frequent guest on major financial networks including CNBC, Fox Business News, Bloomberg, and First Business News, where he provides expert commentary on market volatility and options strategies.

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About the Author

Mark Sebastian

Mark Sebastian

Former CBOE floor trader and CIO at Karman Line Capital. Author of ‘The Option Traders Hedge Fund’ with over 30 years of options trading experience.

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