Wednesday’s Bloodbath Might Only Be The Beginning

The Option Pit VIX Traffic Light Is Yellow: Volatility Is Going To Make Wild Moves.

Hey Traders,

Wednesday’s post FOMC move was a total VIX bloodbath …

For the longs.

But is it a one day blip, or is VIX actually going to head lower?

It might only be the beginning.

Believe it or not, VIX futures fell almost as hard as the VIX index itself on Wednesday.

Spot VIX closed 21.99 on Tuesday, the VIX futures closed 21.60…

Today:

Spot VIX fell 2.60 and the future fell 2.40!

That is a MASSIVE futures move, even this close to expiration.

VIX futures are pricing in a “Santa Claus drop” for the VIX right now …

The current trend would put VIX at 17 by Friday, and potentially set up for a really low print for next Thursday … 

Potentially below 15.

What makes me say this?

Normally, when spot VIX is trading above the front month future, VIX is rising, not falling.

Typically, the futures are more right than the cash index …

If the futures are correct, VIX needs to fall to 18 to normalize, if the futures do not move.

But they will.

My guess is that spot falls another two points, and the VIX futures fall one point to get back to normal.

Then heading into next week, ahead of a three-day Christmas weekend…

All bets are off.

Further, we had another busy day for puts:

The open interest on the 19’s, 18’s and 17’s could cause a downside gamma squeeze, forcing the futures even lower as we head into expiration.

Yesterday I said buy the 18-strike puts for $0.25. Today they closed at $0.50, up 100%.

Now I am eyeing the 17-strike puts for $0.20. There is value there …

Your Only Option,

Mark Sebastian

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