The Option Pit VIX Light Is Red, Volatility Is Likely to Drop.

Hey Traders,

The VIX futures curve remains in a nice contango, with the futures price higher than the spot price.

As you’ll notice below, VIX is trading at a tasty discount to May, the same from May to June and so on. It’s like the TrackMan tracer on PGA Tour golf coverage. You love to see it …

But the tenor seems to have changed a bit over the past couple of days.

And something is afoot that I don’t like …

Notably, take a look at the VIX itself. After falling consistently for two months, the index has stopped in its tracks:

VIX has bounced between 17 and 19 for about two weeks — which is hard on short volatility trades.

More important, to me, is the relationship between VIX and the S&P 500 (Ticker: SPX).

The VIX has been relatively strong as the SPX has climbed, especially since April expiration on the 19th of last month.

Since that time, the S&P is up marginally …  and the VIX is up significantly.

If the VIX was any stronger, the component of my traffic light that takes into account the correlation between SPX and VIX would turn yellow.

This is something I am watching.

While — for now — I continue to lean short volatility, I have certainly dialed back how aggressively I’m trading.

I’m also keeping a tight watch on adding a hedge.

There is a distinct possibility that the market could have a short term rollover and head back to 4,100.

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Your Only Option,

Mark Sebastian