The Option Pit VIX Traffic Light is Yellow: Volatility Is Going To Move.

Hey Traders,

We are now on our seventh day in a row of the VIX being over 20.

The VIX needs to make a decision …

It is time to break out, or give up this higher volatility?

S&P 500 (Ticker: SPX) movement is now almost caught up to the VIX itself.

10-day historical volatility (HV, white line) is almost up to 20. I would call that a reasonably normal spread.

But while the VIX has been above 20 for a while, it has actually been in a pretty tight range:

So the question is: are we going to get a break out, or is vol going to settle back down?

Personally, I am now of the opinion that this could last for a week or two longer before we start to move higher again.

But October paper in VIX is not positioned for anything but the VIX tanking.

In call options, the 30-strikes have open interest over 100,000. We do not see this in the 20s or the 25s …

In the puts, EVERY STRIKE BELOW 21 has 100,000 contracts open!

What is going on?

Traders are hedging actual risk in SPX, and setting up vol fades in VIX.

Volatility has not worked as an upside hedge …

SPX has.

We continue to like short SPX and short VIX.

Your Only Option,

Mark Sebastian