The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.
Hey Traders,
Something incredible and rare is happening in the VIX right now.
It’s cause is the short time to expiration, and the huge spread between the VIX cash and the VIX futures.
In fact, in all my years, I do not believe that I have ever seen this.
Oh, and it makes for a really awesome trade, too.
August VIX futures and options have four trading days left … that is it.
Yet the spread between the cash and the futures is about 1.65 points.
To put that into perspective, normally it would be about a 0.50-0.75 spread at this point.
I cannot stress how WIDE that spread is.
In order for the two to converge — which they HAVE to do by next Wednesday, by the way — the August future needs to lose about 10% of its value!
With this little time, which kills option time premium, and this wide spread, something has developed that I do not think I have ever seen.
Here is the VIX August 18-strike straddle:
It is carrying a midpoint price of $1.90.
The VIX closed at $16.06.
Let’s do some math here for a minute …
What is $18 – $1.90 (the price of the straddle)?
16.10!
That is right, the VIX August 18-strike straddle is currently trading below parity.
Straddles do not trade below parity in the VIX.
Think about it.
If VIX drops or sits, my puts will expand to more than 1.90 by Tuesday night..
If VIX explodes, my 18 calls will reap huge rewards…
If VIX moves up to 18, the future is going to run to 19 or 19.50, and VVIX (the VIX of the VIX) is going to pop, increasing the price of this straddle.
If I hold this for a day or two, I am going to have a very hard time losing money on this.
Your Only Option,
Mark Sebastian