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

Hey Traders,

The VIX has had a nice run since bottoming out on November 3rd.

But that said, it does not mean that you would have made money being long volatility.

It is really hard to make money owning VIX or VIX ETP options like ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) or  iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX).

That said, you can make money trading long, but it’s not the way you think …

The VIX hit its bottom on October 21st.

It traded below 15, and closed at 15.01.

If you said to yourself, “this has to be the bottom for volatility, I am going long,” how do you think you did?

Below is a chart of VXX (top) and the VIX (bottom):

Well the VIX did rally …

Over the course of a couple of days it rallied from 15 to 17.

But look at VXX; it went nowhere!

In fact, if you bought VXX on the low tick, and sold today, you would be losing money!

So how does one go long volatility?

In a market like this, it makes sense to short-term day trade.

But to truly go long volatility, the Option Pit VIX Traffic Light should at least go yellow.

But we have not had a yellow light this entire time!

Remember, the yellow light usually means that the VIX futures curve has flattened up.

Something like we saw in mid-September:

Even then, you cannot rest on your laurels.

One must trade short-term, take profits and roll higher to stay long …

It’s the only way, short of a March 2020 event.

Then, there would no longer be a drag on VXX or UVXY.

That has not happened this entire time.

Thus, I am looking to stay flat-to-short until the curve actually moves.

Your Only Option,

Mark Sebastian