The Option Pit VIX Traffic Light Is Green: Volatility is likely to stay high

My VIX light is now green.

Here is why:

For starters the VIX curve is now in backwardation:

For the light to go green I need to see not only the VIX over the future curve, but I need to see at least 2 months of backwardation.

As you can see, October is over November, which is over December.

The long-dated futures are also in backwardation although they are as a unit trading at a premium to November and December.

This is due to the massive amount of open interest back there.

The second piece of turning my light green really developed on Monday morning.

With the VIX at 31, we need a 2% daily movement to pay for the VIX.

As I write this we are down less than 1%. Yet VIX is REALLY picking up some steam-breaking 32.

Yes, there is some weekend effect, but even taking that into account the VIX is up more than a point.

VVIX is also heating up, breaking over 100.

This means that VIX could reach 35, and the SPX is probably going to touch 3600 … or at least the market is bracing for it.

With that in mind,  what should a trader do?

The most significant trade on Monday was the November 35-50 call spread for 1.43.

I can buy a bull November call fly for cheap and hedge it with a few REALLY cheap downside puts that were nicely in the money only a few days ago.

There is also a great opportunity to day trade the ETP which now has the wind at its back as opposed to the normal headwinds.

I will be trading UVIX, likely bullish this week.

Your Only Option,

Mark Sebastian