Sub-20 VIX on the Horizon?

Hey Traders, 

While the VIX opened marginally higher on Monday, don’t be fooled!

It’s just an illusion.

The concept is known as “weekend effect,” and it causes the VIX to tend to be up on Mondays, due to the fact that option decay is continuous and trading days are not.

Essentially, most of the weekend gets priced out of options by Friday’s close.  

This causes the VIX to seem under pressure on Thursdays and Fridays.  

On Mondays, with the two closed days having rolled off the calendar, VIX “rights itself” to the appropriate number.

Today, the number was 21.65 — the lowest Monday open in the months

That, friends, is telling.

It is another drop in the bucket of overpriced volatility that I think is about to spill over into an all-out volatility collapse.

Early in Monday’s session there have been two relatively large trades that have gone up.

  • A trader has bought 10,000 of the VIX March 23 puts paying 1.35.

  • A second trader bought the May 18 puts 7,000 times for .30.

Both of these continue the market trend of the VIX positioning for a drop.

Looking at February options, open interest is still HEAVILY leaning toward a volatility drop in the next two weeks.

From the 25 strike down, there are about 1.8 million open puts — 21% of all open interest and almost half of all the open puts.

In other words, there is a LOT of money betting VIX is going to drop.

I expect, even if the VIX stays positive from the weekend effect, we could see some real pressure on the Feb future early this week.

I like long the Feb 22 puts as they are actually in the money relative to VIX and at about .40, are fairly inexpensive.

The Option Pit VIX Light is Red, we are leaning short volatility.

Your Only Option,

Mark Sebastian

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