The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to swing wildly.

Hey Traders,

The VIX has now held below the 30-handle for several days in a row for the first time since April.

The VIX of VIX, VVIX, is now trading at its lowest levels since the pandemic.

The Option Pit VIX Traffic Light has now been switched from green to yellow.

Does this mean we are about to see things normalize, and the market will take off?

Or … will the VIX move back to 30?

Let’s look.

The VIX futures curve is now back in a contango formation (with futures trading higher over spot VIX):

Yes, the VIX is still over 25, but it is at a level we have not seen in several weeks.

What is really fascinating, though, is VVIX.

The volatility of VIX options has been absolutely crushed the last few days …

The VVIX is the lowest we have seen in more than two years!

If it is correct, in this case, VIX should be headed lower.

All of this creates a decent recipe for a nice market rally.

Now will a rally happen? 

I am not so sure.

But in the last two months, we have not seen a better set-up for the S&P 500 (Ticker: SPX) to move back to 4,250 or 4,300 …

I would be buying VIX puts and hedging with VIX butterflies, which are incredibly cheap right now, given the low VVIX.

Your Only Option,

Mark Sebastian