Why Today’s Rally Doesn’t Mean We Are Out Of The Woods

The Option Pit VIX Traffic Light Is Green: Volatility Is Likely To Go Up.

Hey Traders,

The market is in full backwardation, with VIX futures trading progressively lower …

Sometimes this represents a bottom for the market.

But there are times where it can represent a serious weakness in the market.

So the question is: will VIX stay high, or dip back below 20?

The VIX closed on Friday over 30, and the Futures are now in full backwardation:

This is in spite of Monday’s rally …

Frankly, the rally on Monday is not “all there.”

While the Dow Jones Industrial Average (Ticker: DJI) is up nearly 2%, the Nasdaq 100 (Ticker: NDX) is flat.

This again represents money moving to quality.

This type of behavior usually does not signal there is an end in sight …

While I think the action on Friday was certainly full of panic, especially in VIX …

The overall shape of the curve says we could be here for a bit.

At the end of the day on Friday, a customer put THIS trade up:

The trader sold the January 19-17 put spread collecting $0.40.

Here or she then bought the January 60-70 call spread for $0.48.

Net he or she paid $0.08 to be long the VIX above 60, and up to 70.

This trade is almost certainly a hedge …

It is probably against a big equity or credit portfolio …

The fact that they are stepping in to hedge could be viewed as bullish because they are hedging instead of just selling …

The fact that they used the 60-70 call spread to create this exposure is curious …

Keep an eye out, because Tuesday will be telling.

In the meantime, hedged short bets in December still look interesting.

Your Only Option,

Mark Sebastian 

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