VIX pointing Toward a Breakout
VIX pointing Toward a Breakout
While I continue to be a bit of a bull, there is something lining up that will at least keep me in cash or less short vol over the next few days. The SPX has done NOTHING over the last few weeks. Realized volatility is in the toilet at well below 10% over the last 10 days and right at 10% over the last 30 days.
Livevol (R) www.livevol.com
At the same time, look at what has been happening to the VIX. It has rallied and rallied and rallied over the last few days. At this point, the VIX is trading at 100% premium to historical vol. 
www.vixcentral.com
At the same time, the spread between cash and futures has collapsed to a super tight spread. This is unusual, espeically this close to expiration and with the VIX so low.
So what does all this mean? A few things, but most importantly, I do not think it points toward any directional play, but it does point toward a volatility move. I think we are, at some point this week, going to see a multi standard deviation move. If the move is higher, like we have seen in the past, we will get one big move and then probably a slow down and slow rally higher to 1470-1480 or so.
If we get a sell off, this could be the beginning of a test of 1400 or maybe even 1350. It has been so long since we have seen a move lower of more than 20 points that any real sell off will have some carry through.
The Trade:
Because of the tight spread between VIX cash and VIX futures, we think owning a bullish call spread makes sense in the near term against being bullish SPY put spreads.
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