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.


Why?


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


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.