The Option Pit VIX Traffic Light Is Yellow: Expect Wild Moves in Volatility

Hey Traders,

After a rip-roaring week leading into quad witching, I was not sure what to expect on Monday.

We got an inside day, with the S&P 500 never moving up or down 1%.

At the top, the S&P 500 (Ticker: SPX) was up about 15 points, briefly breaking the 200-day moving average (DMA).

At the bottom, the S&P 500 broke the 50 DMA, and was down nearly 40 points.

In the end the SPX ended the day essentially flat, down 2 points.

The VIX futures curve made some odd moves:

The whole curve actually moved higher, but the contango (futures moving progressively higher) between April and May steepened.

The key, though, is this:

The VIX dropped to below 24, closing at 23.53, the VIX futures are 25.80.

This is a more than 2-point premium, with about a month to go, which is REALLY wide, given how high the VIX currently is trading.

With VIX falling but still above 20, I would expect the curve to closely track VIX itself …

It did not.

What does this tell me?  

The rally may be long on the tooth.

Not saying we can’t go up… We can.

But futures are not buying in right now.

Add the fact that the SPX just had a doji at the top of this trend (totally stealing this from Licia Leslie) … or is that a hanging man? Licia???  

Either way I know that candle is bearish.

Keep an eye out, we could be soft the rest of the week … especially given how high beta performed on Monday (ARK Innovation ETF (Ticker: ARKK) got smoked, dropping nearly 2%).

Your Only Option,

Mark Sebastian