The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to move wildly.

The volatility is too damn cheap!

The VIX closed on Tuesday at 18.66

That would imply the SPX is moving a touch over 1% a day. Take a look at the movement on Tuesday:

We went from up flat on the day … to up 50 … to down on the day by 20 … to up 50.

The movement on the day equates to a volatility in the 30s, but VIX is 18.77.

What throws people off is looking at GARCH volatility, which uses end of day movement.

According to GARCH – which is only calculated on close to close prices – volatility is too high. But, really, look at the movement on Tuesday, it is not.

VIX itself had a wild day, running up over 20 and closing at 18.66

In this market, you need to be long volatility.   

The market is going to open down on Wednesday (probably) … if you are not long vol in SPX and hedging it with VIX, you are not reading this letter enough.

My best trade is buying the UVIX 18 puts and buying puts on SPX. We could see some serious outperformance out of one of the indexes in the next few days.

Your Only Option,

Mark Sebastian