The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.
Hey Traders,
Over the past few weeks, one of the puzzling aspects of the VIX has been the cost of its options.
The VVIX, which is the VIX of VIX, has been REALLY HIGH.
Which means the cost of VIX options — both calls and puts — has been REALLY HIGH.
But now … the VVIX is at its lowest level since July 2nd.
Here is what that means and how to profit!
The VVIX is now trading at just over 110.
That’s actually its lowest level since July 2nd:
There has been quite a collapse in the VVIX since last week, much like what we’re seeing in the VIX itself.
However, unlike the VIX, which is still managing to hang on over 17 …
The VVIX has really fallen off a cliff, and now sits at a key level!
Over the past few weeks — and frankly, save a week or two in June and July, over the past year — when the VVIX gets below 110, traders start scooping up options like nobody’s business.
Traditionally, at least prior to 2020, 110 was actually pretty high.
Now 100 has actually been the floor, and 110 has been a hard level to cross.
The 200-day moving average (I know, I know, I don’t usually pay mind to moving averages, but I’m not about to get into technical analysis on you, I promise!) is 114.84, and the 50-day moving average is a frothy 117.40!
Folks, to put that into perspective, in 2019 the VVIX only touched 117 ONCE!
What does all this mean?
Options on VIX have been VERY expensive.
This has kept the hedgers away from the product, and instead sent them toward put options on S&P 500 (Ticker: SPX) …
Or as an alternative, they have just bought VIX futures outright (another reason for the HUGE contango in the VIX curve).
It’s been very difficult to win buying calls, even when you are right.
Puts have been somewhat pricey too, although the stiff drop in the VIX has helped them be at least somewhat profitable over the last few months.
If the VVIX can get back to 100, we’re going to see an increase in call volume, and it will become MUCH easier to win by owning puts.
It will also have an impact on ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) and iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX), whose options prices do track the VIX.
In addition, there’s a good chance it will also cause the VIX itself to finally make that next leg down.
Traders who then use VIX call options instead of futures and SPX options will move money out of the SPX and into VIX.
Lower demand for SPX options, especially puts, will drop skew in SPX, which will in turn allow VIX to drop.
The point here is that if VVIX can get down and stay down, it could open the door to VIX tanking.
The September 15 puts are $0.05 …
Believe me, they are in play.
Your Only Option,
Mark Sebastian