Today, December 30th VIX Forecast

Hey Traders,

The VIX Light is Red, but barely.

This means that while I still expect the VIX to fall over the next 2 weeks, I’m less sure about it than I was yesterday.

Why?

While there are several drivers in my VIX Light that moved on Tuesday, the one that stuck out the most was VIX correlation.

When the S&P 500 is up, the VIX tends to be down.

When the S&P 500 is down, the VIX tends to be up.

However, with the VIX in the 20s, the severity of the move in the S&P 500 comes into play.

For the VIX to be 17%, the S&P 500 needs to move about 1% a day to justify the level of implied volatility.

It has NOT been moving that much. 

Here is a view of S&P 500 20 day realized volatility (how much the S&P 500 is moving close-to-close every day over the last 20 rolling trading days):

Trailing 20 day Historical Volatility (another word for realized volatility) is 9.

See that in the bottom right hand corner?

That would justify a VIX of about 12 (including risk premium).

Yet Tuesday, a day when the S&P 500 was down a measly 8 points, the VIX was up 1.38% to 23.24.

That is a HUGE move for how little the S&P 500 sold off.

Be wary… This harsh increase in the VIX indicates a potential wild move in the near future.

My team thinks the Georgia Senate runoff elections are causing the move in implied volatility.

I disagree.

We are running into earnings and the potential for some serious tax selling starting after the first of the year.

Frankly, it doesn’t matter why, it matters that the market thinks we might.

One more day of this and my traffic light will 100% switch from Red to Yellow. (Yellow means we could see wild VIX and S&P 500 moves).

The message here is that with the strong up movement in the VIX is tied to hedging.

With the SPX right near an all-time high, that makes some sense, but the degree to which it appeared to happen today is starting to make the hair on my neck stand.

Essentially, yesterday’s analysis has quickly become outdated.

I still like short VXZ, but in front of that, I think some long VXX might be in play, and I put out a trade to our Volatility Edge subscribers as such.

Volatility Edge bought the Dec. 31 18 calls in VXX today ALONG WITH a long-dated VXZ short play.

Stay vigilant.

Your Only Option,

Mark Sebastian


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