The VIX Traffic Light Is Red … Or Is It?

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

The Option Pit VIX Traffic Light is red, telling me that volatility is likely to drop …

Or is it?

My light has been glaring red the last few days …

Today was different.

The S&P 500 (Ticker: SPX) was up …

But so was the VIX.


And more importantly, what does this mean for volatility?

Negative Correlation Break

The SPX was up about 8 points today, well off the highs that took the index nearly to 4,600.

At the same time, we saw the VIX rally:

This is the first time we have seen a break in SPX and VIX negative correlation in some time.

So what is the cause?

There are two potential answers.

  1.  We are topping out.

  1. Earnings from the mega-caps.

The answer could actually be both.

We saw tonight that Microsoft (Ticker: MSFT) was up-to-flat, and Alphabet (Ticker: GOOGL) was down-to-flat.

In the end, the net effect on the S&P is pretty nil.

At the same time, if the mega-cap earnings are not going to cause a rally, that is a decent sign the market might be a little toppy here.

Do I think we have a huge pull back coming? No …

But could we sit and spin for a bit, or have a soft patch pull us back to 4,550 or lower?  

Yes, for sure …

So what to do?

I laid out how to hedge: buy puts, buy a call spread.

I would use any softness though as a chance to accumulate short volatility.

This market is going to go higher through Thanksgiving, and the VIX is going to 14.

Your Only Option,

Mark Sebastian

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