SPX Drops, VIX Yawns

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Hey Traders,

The big indexes all got smoked yesterday.

The S&P fell almost 1%, while the NDX and the Russell 2000 dropped closer to 2%.

Yet I’m darn bullish heading into Wednesday’s trading …


Take a look at how the VIX curve moved on Tuesday:

What are we seeing?

The purple curve is the VIX curve close on Monday …

The blue is the same thing for Tuesday …

What do you notice?

The curve did NOT move.

With a 30-point drop in the S&P 500, an essentially flat curve signifies a VIX yaaawn at the selloff.

You see, the VIX places more emphasis on at-the-money options than out-of-the-money options …

The VIX curve not moving on that selling essentially signals flat, or even declining, volatility …

Even if the VIX itself read slightly higher.

I have said for a long time that the VIX futures traders are the smart guys in the room.

If they are not buying up futures on a down move like today, what does that mean for the market?

There was little appetite for hedging as the S&P 500 dropped and the NDX and RUT got smoked.

I view today’s price action as bullish the S&P 500 and am looking for a move well above 3900 for the week.

And with that, I still think we could see a sub-20 VIX.

Your Only Option,

Mark Sebastian

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