The Option Pit VIX Traffic Light Is Green: Volatility Could Go Up.

Hey Trader,

The Option Pit VIX Traffic Light is Green, for now …

So here is a question …

Was this vol pop really about Russia, or was it about something else?

Something happened yesterday that had me thinking … 

Maybe the market cares less about the Ukraine conflict and more about this …

Here is what I saw, and what to do …

On Wednesday,  markets were down most of the day.

The VIX, while tepid, was marginally higher.

Then at 2 pm ET, the floor fell out of volatility:

Take a look at the nasty downward move VIX made!

What was behind this?

The Fed.

The FOMC minutes came out …

While the market ended Wednesday mostly flat, VIX took it on the chin.

The VIX futures curve, which had been extremely flat all day, made a pretty significant move:

By the end of the day, the VIX curve was back in contango …

The VIX of VIX, VVIX, which I discussed on Wednesday, also got smoked … ending the day down almost 6.5 points.

If things stay as is, the VIX Traffic Llight will be yellow by Thursday afternoon.

So it is entirely possible that what we are dealing with is not Russia/Ukraine, but very much FOMC driven (not that a real war wouldn’t be a problem, but that the market sees the likelihood as far lower than many perceived).

It may be the FOMC that has been keeping vol so high …

So what does that mean for you?

The next meeting isn’t until March 15-16.

Leading up to that meeting (which happens to be VIX expiration), expect some fireworks.

However, we could be heading for some VIX doldrums in the meantime..

I would buy the March 20-strike puts for $0.50, and sell the March 18-strike puts at $0.20, potentially on a ratio.

Your Only Option,

Mark Sebastian