Too Good To Be True?

Mark Sebastian

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

Hey Traders,

The VIX rallied ever so slightly on Monday, mostly on the back of weekend effect as Monday was an inside day for the market.

The S&P 500 only had a 26 point range.

What caught my eye coming off the weekend was the VIX curve:

Notice that June – with just about 30 days to expire, and about to become the front month future – is trading more than 3 points rich to the cash index.

This is extremely elevated relative to normal levels.

In a low VIX environment, this spread would be about 1.5-1.75. Under normal conditions, I would be looking for 2 points.

Thus a 3 points spread is EXTREMELY rich.

It’s a sign the futures don’t trust the cash index.

This presents an opportunity, because either the futures are right and the SPX is going to start moving fast in the next few days …

Or that June future is about to get smoked!

Either way, the trade is to buy SPX options and go heavy short on VIX.

I’ll be constructing a trade around this during our Trading Desk session which takes place EVERY DAY here at Option Pit.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian

VIX Edge

Mark Sebastian

Mark Sebastian is a former member of both the Chicago Board Options Exchange (CBOE) and the American Stock Exchange (AMEX), where he spent years mastering the art of options trading in the most competitive environment imaginable. As Chief Investment Officer at the hedge fund Karman Line Capital, Mark manages sophisticated options strategies for institutional clients. He is the author of two highly regarded books on options trading: ‘The Option Traders Hedge Fund’ and ‘Trading Options for Edge.’ Mark is a frequent guest on major financial networks including CNBC, Fox Business News, Bloomberg, and First Business News, where he provides expert commentary on market volatility and options strategies.

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