The Option Pit VIX Light Is RED, and volatility is likely to drop.
Hey Traders,
On Monday … the S&P 500 dropped 3 points, yet the VIX shot up.
On Tuesday … the S&P 500 dropped 12 points, and the VIX was down big.
What gives?
As I explained yesterday, the culprit is the Russell 2000 Index (Ticker: RUT).
The other major indexes have been boring, but check out the movement of RUT compared to the S&P 500 (expressed in terms of 20-day historical volatility):
While volatility on the S&P (the purple line) has been falling and is now hanging around three-month lows …
… movement in the RUT (the blue line) has been climbing steadily.
That by itself seems to be holding up the VIX right now.
But can movement in the RUT really hang around 31 while the S&P and other indexes do nothing?
Not for long!
Either the S&P 500 has a nasty move coming, or vol is going to come off in RUT…
Here is a hint …
It’s going to be the latter.
Take a look at this chart from the past two years …
We simply do not see one dropping while the other goes up…
RUT movement is going to drop.
When that happens, VIX will drop — like a stone.
Potential Profits
The 80,000 VIX put options traded on Tuesday between the 19 and 17 strikes say I’m right:
I’m a buyer of the VIX April 19-17 put spread for about .60, I think it has the potential to balloon to 1.20-1.50 by next week.
The Option Pit VIX Light Is RED, and volatility is likely to drop.
Your Only Option
Mark Sebastian