Where Are The Hedgers?

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

Hey Traders,

There are some huge events this week.

The Federal Open Market Committee (FOMC) meeting and press conference on Wednesday …

And nonfarm payrolls are going to be reported on Friday.

Yet look at the VIX:

While it has picked up a little bit since October 26, after breaking through the 17 level on Wednesday and Friday, it has failed to hold above that number.

Meanwhile, volatility of VIX…

Is falling through the floor:

Even the VIX of VIX, VVIX, has not been doing very much lately:

Why is this the case?

The answer is that while there are certainly some risks, the moves from the S&P 500 (Ticker: SPX) around them have not materialized.

Traders have stepped away from stepping in to buy puts.

There are more naked longs than there were several months ago.

The CBOE SKEW Index (Ticker: SKEW) has not been able to find a bid, and downside options are getting cheaper. 

The VIX futures curve has even started to normalize.

VIX is trading at about a $2 discount to the front-month future; that’s a lot less of a premium than it has been trading in the recent past, and there are still 17 trading days left.

So what does this all mean?

VIX is going to go A LOT lower, potentially this week.

Once we get through the FOMC and nonfarm payrolls, we are looking at VIX trading well below 16, and probably below 15.

Your Only Option,

Mark Sebastian

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