The VIX Traffic Light is Red: Volatility Is Likely to Drop.
Hey Traders,
As you can see, the Option Pit VIX Traffic Light is red … barely.
We saw the VIX slip back into a contango (futures trading progressively higher over spot) on Thursday, with expectations that we could see a big up day on Friday (potentially).
What is interesting right now is that for the first time in a while, the VIX curve is NORMAL.
That’s right; the curve is where it should be.
What does this mean with the VIX still over 18, and the curve normalized?
You will want to know … Trust me …
Curve Is The Word
The VIX light is now red; this means volatility is likely to drop.
What pushed it yellow the last few days was the VIX curve …
But now, the VIX curve is completely normal:
VIX is 18.69 (too high) …
But more importantly, the VIX futures are normally spaced …
October is trading almost exactly 2 points above the cash, as it normally would with 34 days to expire.
November is where it should be …
Yes, December is low, but that seasonality is expected.
So what does this mean? Why is it important?
The answer is the VIX ETPs.
Watch the VIX closely over the next few days.
If VIX drops and the futures follow, and the curve stays about where it is (the futures do not widen relative to cash), we have some real opportunity to play short volatility.
If the VIX goes to 16 or 16.50, and the curve holds …
It is going to be a BLOODBATH for ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).
We could see UVXY sub-20 by the middle of next week if the curve stays stable.
If the curve widens with the VIX falling, we are entering the same pattern we have seen the last six months …
VIX drops, futures hold, we sell off into expiration …
If the curve moves … we could be entering a new vol regime …
One that brings the VIX to 12 or 13 …
One that also opens up the possibility of a real correction (because the market won’t be over-hedged).
Today we could see a hard rally … we could have some clarity then (if I am right).
Your Only Option,
Mark Sebastian