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

Hey Traders,

The VIX closed up 0.31 points on Tuesday.

The S&P 500 (Ticker: SPX) lost a touch over nine points.

Yet the front month’s future actually fell.

The rest of the curve … not so much:

The green curve is Friday’s close, the purple Monday’s close, and the blue Tuesday.

You can see that the near-dated months, notably September, did fall. The back end … not the case.

With the VIX up on Tuesday, the spread between cash and future actually tightened up further.

With the spread starting to tighten up, this makes calls on VIX more appealing to trade vs puts in September.

I still believe that we could see the VIX fall post-Jackson Hole, leading into the FOMC meeting and non-farms in September.

Futures were certainly behaving that way.

But with the spread now tighter, the SPX vs VIX, while still appealing, has less edge relative to VIX puts vs a VIX call spread.

At this point, I would almost call it a draw.

Thus if you have the SPX/VIX pair, I still like it.

But a call spread in VIX vs a put is now open for business.

Again, I think the VIX is going to drop …

But if it does not, with everyone somewhat complacent, maybe we finally see that 40 VIX everyone has been waiting for.

If the market is able to break 4000 … which I am not sure it can

Your Only Option,

Mark Sebastian