The Option Pit VIX Traffic Light Goes Red

The VIX traffic light was dead on when it switched from Red to Yellow.

“But Mark,  the VIX went up, and then down,  and is back where it started…how is this dead on?”

You might ask.

Remember,  a yellow light does NOT mean that the VIX is going higher.

A yellow light means the VIX is going to move wildly.

Taking a look at the last few days,  I think that is pretty darn hard to argue:

In the course of 5 days the VIX went from 29,  to 22,  to 27 and back to 22.

That is WILD movement.

Now that we have seen the wild movement,  the VIX Traffic Light is saying,  things are going to calm down.

The biggest indicator switch is our VIX Futures Term Structure Indicator.

Where Monday VIX term structure was in full on backwardation (when the VIX is above the 1st future,  and the 1st future is above the second…and so on).

Now the VIX curve is in a heavy contango.

Take a look at what that looks like below:

Of note,  February, which had been extremely stiff, has taken a dive below March.

Thus,  the back end of the curve is starting to show bearish volatility signs.

In the end,  if the VIX is going to take a real dive, it’s going to come from trading in SPX…

BUT VIX term structure is pointing toward a sub 20 VIX on the horizon.

There is value in VIX FEB OTM puts.

The VIX Traffic Light is RED:  This means I expect the VIX to drop in the near future.

Your Only Option,

Mark Sebastian


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