The Option Pit VIX Light Is Yellow, and Volatility Is Going to Move.

Hey Traders,

Thursday was a strong day for the S&P 500, the Dow Jones Industrial Average and the Nasdaq-100.

All three indexes were up more the .8%. At the same time, the VIX fell to 18.35 …

That said, the Option Pit Vix Light changed to yellow. And remember what that means for the proprietary indicator that guides my volatility trading:

• • • Yellow: The market could go either way. Not the best time for normal investing. Tap the brakes

Why?

As longtime readers know, my VIX light has four sub-indicators:

• • • VIX Curve
    • VIX Correlation
    • VIX Volatility
    • VVIX (Volatility of VIX Options)

One of those went full green yesterday. Even though the other three indicators remained red, the way the VIX Light is built, if one indicator turns green, the overall light has to be yellow.

Can you guess which indicator made the switch?

If you said VIX Correlation, you’re a winner!

Below is a chart of the S&P 500 (top) and the VIX index (bottom) since April expiration:

The S&P 500 is up about 25 points in the two-and-a-half weeks since April expired. Over that same time period VIX has gone from 16.65 to 18.35.

That means the S&P 500 and the VIX are both going up.

When we see the two indexes begin to correlate, that tends to lead to very bad things for the market.

Moreover, we are almost certainly going to see a strong move in VIX — usually up, but sometimes down.

The Takeaway

A yellow VIX Light doesn’t mean the market is going to sell off or that VIX is going higher …

It means the VIX is likely to make a strong move in one direction or the other.

Sometimes it makes a strong move in both directions.

The point is, that I am going to be looking for ways to play movement in the VIX today,

It could be a straddle …

It could be a strangle …

I’ll update you on what I end up trading on Monday in Volatility Edge — the weekly trading program based on the Option Pit VIX Light.

Until then, remember …

The Option Pit VIX Light Is Yellow, and Volatility Is Going to Move.

Your Only Option,

Mark Sebastian