The VIX Is Slowing

The Option Pit VIX Light Is Yellow (for now), and the VIX will move, though direction isn’t certain.


Hey Traders,


While the VIX had and up-and-down day on Wednesday, overall it is slowing


What am I seeing that maybe you aren’t?


The short answer is: the VIX curve.


For the first time in a long time, not only are the front two months in a contango (futures price is higher than the spot price) …


But the WHOLE CURVE is starting to develop a serious contango. (Maybe it’s … contangious.)


Check out the shape of the VIX curve:



Notice that, not only is March in a contango with April, but April is trading a full point below May, and May .50 below June.


I have not seen the curve this steep in a VERY long time.


When the curve starts to slope, it’s a clear indication that


  • The VIX is slowing down
  • It’s legitimately bearish the cash VIX (the VIX index that gets quoted on TV)The Option Pit VIX Light WILL be Red tomorrow if things stay this way.


A Red light means the market is falling or remaining stable, so you can create a trading system and run your normal risk approaches. 


What’s My Play?


I would point out that April, in particular, while in the middle of a nice contango, is trading at a HUGE premium to the cash VIX at about 4 points.


This sets up a “convergence trade.”


A convergence trade uses options to play the VIX future moving, (or “converging”) to the VIX cash index.


With the VIX at 22.56 and the future at 26.50, there’s a play that makes money if NOTHING happens.


Here’s the setup:


The VIX April 25 put is 2.5 points IN the money if the April options were to expire today …


But … they are a 1.5 points OUT of the money relative to the VIX future.


Let’s look at the option chain:



So, the April 25 put is in a unique position … it is technically out of the money and in the money at the same time.


At a cost of 2.60, if the VIX expired today, the 25 put would lose 16 cents.


The 21 puts, meanwhile, are out of the money, and if the VIX expired today would go out completely worthless.


What if I bought the 25 put for 2.60 and sold the 21 put at .60?


It would be a long put spread for 2.00.


A put spread that IF VIX expired today would be worth $2.44 …


So think about this …


I am buying a debit spread, that makes money as time passes…


Even better, if the VIX drops, this spread could expand to $4.00.


So, if VIX does nothing I win …


If it drops, I win BIG …


If it rallies marginally, I can STILL WIN (I break even at 23).


Only if the VIX blows higher do I lose.


This is the power of VIX options and why I trade them …


This type of play is almost exclusive to the VIX and a trade I really like right now.


The Option Pit VIX Light Is Yellow (for now), and the VIX will move, though direction isn’t certain.


Your Only Option,


Mark Sebastian

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