The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to swing wildly

Hey Traders,

The VIX closed up 0.65 points on Monday to 26.21 …

This is basically flat given we have the weekend effect rolled into Monday’s trading.

VIX futures actually fell a touch on Monday, even though the VIX went up.

In the end, the market landed with a very small partial backwardation with the cash index slightly over the September future:

These moments are when the VIX either turns right back around and we get a massive rally …

Or the VIX explodes higher (thus the yellow light).

One trader on Monday was betting on the former.

The trader bought a massive amount of October 20 puts for 0.20 tied to futures on a 5 delta.

The timing of this trade cannot be ignored.

The trader clearly thinks we could see the VIX pull back and potentially drop down below 20 in the coming weeks.

They did hedge their bet with futures …

Obviously this could be connected to a structured product or a long variance position, but no matter how you slice it … the trade is bearish.

Given the spread between Oct. and Sept. – and Sept. being under the VIX cash – I might actually look to buy puts in Oct. and hedge with Sept. call spreads.

Questions? Drop a comment below or shoot me an email.

Your Only Option,

Mark Sebastian