Where A Market Rally May Send The VIX

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,


We have the Federal Open Market Committee (FOMC) meeting, we have nonfarm payrolls …


There is so much on the plate this week …


Yet the VIX is now hovering right at 16.


Even more interesting is what has happened with the VIX futures, and what it could mean for trading.


Check this out …


The VIX closed at roughly 16, and here is what the VIX futures curve looks like, with a little more than two weeks to expiration:



VIX futures are at a 1.90 point premium to the cash index.


What about the last time VIX got down here with about two weeks to go?


On August 30th, VIX had about 16 days to expire, about the same as now, and nonfarms were about to come out on that Friday:



The VIX was 16.19, and the September future was at 18.70, a full 2.50 point premium.


While that might not sound like a huge difference, when it comes to futures spreads, 0.60 is HUGE.


What has changed?


Again, look at the CBOE SKEW Index (Ticker: SKEW):



At the end of August, SKEW was sky high at over 160. Now it is around 145, which is still high, but SIGNIFICANTLY lower than it was in August.


Traders are simply buying less protection.


So what does this mean?


If the market continues to rally,  we are going to have a sub-15 VIX (as I have stated all week).


It also means that VIX futures are of the belief that VIX itself is not out of whack …


If there was anticipation of a rising VIX, we would see the curve more like back in August.


So, I will say this one more time, the November 15 puts are a really nice calculated bet on the VIX breaking to a new low.


Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.