The Market Smells VIX Blood

The Option Pit VIX Light Is Yellow: VIX Is Going to Move Wildly.


Hey Traders,


My VIX light barely stayed yellow on Monday.


Most of the day, if the market had closed whenever I was looking at the VIX, the signal would have switched to green.


But … the end-of-day rally and VIX drop stopped the Option Pit VIX Light in its tracks!


I still could have made the call to flip the light — but I decided not to.


The factor that made up my mind was something I was really surprised by …


Holding Yellow


Somewhat to my amazement, the VIX light is still yellow.


During the last hour of trading on Monday, the VIX really dropped off, and the VIX curve dropped into a pretty steep contango (when futures prices are higher than the spot price):



Ignoring May, whose last trading day is tomorrow, there is a really large gap between June and the VIX cash.


We are nowhere near a green light in the VIX futures curve.


The other indicators — VIX correlation, VIX volatility and VVIX (volatility of VIX options) — are all green or yellow, though.


So I still could have flipped the light green — which indicates things are getting spicy — if I really wanted to.


But then I saw this …


On a day the VIX was running, over 105,000 out-of-the-money puts traded:



The June 17 and 18 strikes were some of the most active …


The others were WAY out-of-the-money crash calls, not really something I usually spend too much time worrying about. (I really care about call buying that is at-the-money or slightly out-of-the-money, NOT calls that are at the 95-strike).


The reason for this view is that traders that are hedging using 95 calls are not really expecting VIX to go to 100,  that hasnt happened EVER…since the SPX options started trading.


They are buying these for Margin and some doomsday scenario that has a .00000001 chance of happening.


BUT,  traders that buy near the money calls,  are not playing unlikely scenarios,  they are playing a reasonable move higher…I pay attention to that stuff.


All of this activity on puts is telling me that the market is starting to smell VIX blood.


Do I think we are still due for a few days of volatility? Yes …


BUT with this kind of paper, I’m not so certain that if this IS a VIX swell, that it will last much longer than a week.


I will be setting up trades that have a hedge for the Volatility Edge, but they will lean short.


I did a similar trade on Thursday, buying May puts and hedging with a cheap call butterfly


I may set up a similar trade in June.


The Option Pit VIX Light is still yellow for now …


Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.