The Option Pit VIX Traffic Light is Yellow: Volatility Is Likely to Swing Wildly …
The VIX traffic light officially switched to yellow on Wednesday morning.
The market opened down 25, and then rallied to close up 10.
While a 35 point swing is not what it used to be, the down-to-up action is classic yellow light movement.
A yellow light means the VIX could make some really wild moves, both up and/or down.
But what has happened in the past?
The truth is that when the light goes yellow, it is far more likely to switch back to red than it is to go to green.
This year, we have had a brief green light, but for the most part, every yellow light has switched to red.
Making the case stronger that we are more likely to see a red next is the VIX futures curve.
The things that switched my light from red to yellow were the less important indicators …
My most important indicator – VIX futures curvature – never left contango:
At the peak of the VIX action on Wednesday, when VIX was over 20, the curve did start to get legitimately flat …
But it did not hold.
VIX really did have a pretty big range, going from over 20 to under 19:
I think there is a strong chance that in Friday’s shortened session, we see the market have a strong rally.
We could see the VIX threaten to head back under 17.50, or even 17 …
From there, I’ll be interested to see if traders try to front-run volatility in the first couple of weeks of December …
I know I have been talking about VIX puts for a bit.
The trade I laid out yesterday, with the hedge, is still the best trade …
I also might look at a long DJIA, holding through the trading session.
Your Only Option,