Toeing The Yellow Line

The VIX Light is Red (Barely): Volatility is Likely to Fall.

Hey Traders,

While the Option Pit VIX Light is red, I can tell you the market is still on edge.

Three of four indicators are still teetering on yellow.

I will definitely be keeping a close eye on things as we go into the rest of the week, with big events like mega-cap earnings in store (and as we get closer to our Hedge Fund Secrets Revealed event on Thursday — sign up here if you haven’t already).

Three of my four indicators for the VIX light are near yellow.

The VIX Volatility Index (VVIX) is still high, although it is dropping some.

VIX volatility is still high.

And most troubling …

The VIX is up 2.5 points over a period where the S&P 500 is up 70 points!

This might be why the VIX futures curve is so flat looking out past August:

While August is at a steep premium to the VIX spot price (about 2.5 points), and is trading somewhat reasonably under September …

Once we get to September,  the whole curve flattens out.

Why does this happen?

The market is nervous.

August futures premium is high, because traders are buying futures.

More importantly,  the flatness of the back end of the curve speaks to how near-dated some of the fears expressed in VIX are.

I think traders are nervous about another rough August, specifically close to Labor Day.

I would NOT be going whole hog short futures here…

That said, a smart calculated play makes a ton of sense.

We did a long VIX put trade vs a long Invesco QQQ Trust Series (Ticker: QQQ) put in my Volatility Edge trading program today.

The trade wins if vol drops, and it wins if the market drops.

The only way it loses is if the “Climb of the Wall of Worry” continues for a lot longer …

Your Only Option,


Mark Sebastian

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