The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.

Hey Traders,

On the heels of another inside day in which the S&P 500 rallied .24% or 10.06 points, the VIX broke 14 for the first time since the pandemic.

Yes, it’s only by .01 points … but that still counts!

With that move, the VIX has potentially entered a new regime – one where we see 12s and 13s.

Remember, over time the VIX trades with a 12 handle more often than any other integer.

But with his crazy market, maybe the VIX is TOO low…

I am here to tell you that while I do think we are due for some selling, the VIX is NOT too low.  

Check out S&P 500 realized volatility:

Over the last 10 days of movement, you could argue VIX is daily priced or even low. But over the last 20, a better sample set, VIX is still trading at a 4 point premium.

This is pretty much equilibrium.

What’s NOT at equilibrium is the VIX futures that are still rich:

While the June and July futures are expensive,  they have come down a lot – and they’re not completely out of whack.

So what is a trader to do?

I think we’re going to get a move one way or another in the next couple of days. I would buy a strangle for Monday.

It’s going to cost you about 41 points – that’s pretty cheap for 4 days of exposure.

Against it, buy VIX June and July puts.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian