VVIX Point to Calms Seas — And This Play

The VVIX — also known as the VIX of VIX — settled below 100 for the third day in a row on Tuesday, closing at 99.05.


This is the first time it has traded sub-100 for more than a day since the pandemic began.


What's more, VVIX has fallen off a cliff in the last week.


Take a look at the one-year chart …



In the span of six trading days VVIX fell from over 112 to 99.


That, friends, is a steep decline.


The fact that the options prices have not bounced off this level is eyebrow raising …


Why would the VVIX be so low with the VIX at the lowest levels since the pandemic?


The answer is two fold:


        • First, remember that at-the-money options hold the most weight in the VVIX index (just like the VIX) and the VVIX has more weighting on lower strikes. In the VIX options, the lower the strike, the less IV there tends to be on the strike.
        • The second answer has to do with option flow. There simply is not demand for calls yet … even with the VIX at 18.


If you look at where trades are happening, there has been some interest in April calls at the 20 and 22 strike.


But most of the call demand is longer dated (May, June or July) and WAY out of the money …


I am talking, like, the July 90 strike.


These calls are being bought as total crash protection, not against an impending vol move.


IF traders thought VIX was about to rally, we would see a TON of action on the VIX April 20 calls …


But, again, there is a little interest there (to the tune of 30,000 calls, but nothing crazy).


Open interest is also pretty low in that strike at about 56,000.



There also seems to be a slowing appetite for puts. The 20, 19, 18, and 17 puts only traded about 25,000 contracts yesterday.


So what does this mean for you, traders?


I think for the time being, this is an S&P 500 Index (SPX) put sellers market. (Remember, VIX is volatility on SPX.)


With little demand for VIX options, traders appear to think that both the index and volatility are going to be stable or meandering lower.


Quick Profit


I can sell the SPX ETF (SPY) 400-390 put spread expiring on April 16 and collect over 1.00.


I like this trade as an income play and if the SPY ends up settling below 400,  I think I would want to take delivery anyway (because I continue to be bullish on this market).


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


Your Only Option,


Mark Sebastian


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