The Option Pit VIX Traffic Light Is Yellow: Volatility Is Likely To Swing Wildly.

Hey Traders,

The VIX futures curve is back in contango (futures trading higher than cash VIX):

Or at least … it is through the November future. 

While the contango is not steep, headed into the 4th of July weekend, even if the S&P 500 (Ticker: SPX) meanders lower, we could see some pressure on VIX futures.

This would be especially true if VIX expiration were not so late into July.

Even so, heading into what should be a slow week and the end of the quarter we could see some pressure on VIX and VIX futures.

With that in mind, I told you yesterday that VIX of VIX, VVIX, is cheap.

That is about as cheap as it is going to get.

Here is something you might not know about what that means …

There is a direct correlation between options on exchange traded products (ETPs) like ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) and 1x Short VIX Futures ETF Fund (Ticker: SVIX), and VVIX.

You see, VIX options cannot be cheap while these ETPs have expensive options. There is an arbitrage.

So the low VVIX is going to move into the ETPs because for VIX to have cheap options, UVXY HAS to have cheap options…

So how can I play this?

I think we could see some serious decline in UVXY in the coming days unless the market really takes a turn for the worse.

Heading into the end of quarter and the long weekend, I am not sure a hard market downturn is going to happen.

I am a buyer of UVXY July 8th puts.

Which ones? 

I put on a trade today in Volatility Edge …

Obviously I put on a hedge too.

But only members get the full details!

Your Only Option,

Mark Sebastian