VIX Truth is Beyond the Headlines

The Option Pit VIX Light is Red, and Volatility Is Likely to Drop.


Hey Traders,


The S&P 500 (Ticker: SPX) had a really nice day on Thursday, closing up 28 points.


But that does not tell the story.


The real news from Thursday is what happened in the middle of the trading day …


The S&P took a mid-day dive and the VIX shot higher.


Take a look …



The VIX shot up with the S&P dropping — and never got back near the levels we saw early in the day.


At one point the VIX was heading toward 16 even — then it almost got to 19.


Clearly, the levels we are trading at are starting to create a wall of worry.


We also saw the VVIX (the VIX of the VIX) get a little pop:


Although I would point out that it didn’t take off, which, glass half-full (for the SPX), would mean we go higher.


But I am watching VIX closely here.


We are not near a yellow Option Pit VIX light yet — but we are not BURNING red anymore either.


As a quick reminder, the light is my proprietary indicator that guides my volatility trading …


        • Red: The market is falling or staying stable. You can create a trading system and run your normal risk approaches. For instance, the light will be red during a contango market (that’s when the forward price is higher than the spot price — not a lot of worry in the market!).
        • Yellow: The market could go either way. Not the best time for normal investing. Tap the brakes.
        • Green: It’s time to be hedged up and ready for ugliness and opportunity. As an example, the light will be green during backwardation. (That happens when the forward price is lower than the spot price. Fear is in the air!)


Despite not being bright red, the big paper was still bearish.


The biggest trade of the day was a VIX June 20-16 put 1 by 2,  with the customer buying 10,000 20 puts and selling 20,000 16 puts paying .80.


This is bearish VIX down to 12.80.


The point is, I saw a lot of mixed signals, some of which are troubling. I am not ready to say vol is going higher, but we could be in this range for a bit.


The Option Pit VIX Light is Red, and Volatility Is Likely to Drop.


Your Only Option


Mark Sebastian

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