How to Play a Flat VIX

04/11/2013 8:00 am EST

Focus: OPTIONS

Mark Sebastian

Founder, OptionPit.com

Despite the major indices notching one all-time high after another, it doesn’t seem to have translated into greater volatility as one would expect when market participants start to get nervous, notes Mark Sebastian of OptionPit.com.

I have been closely watching the VIX curve over the last month for signals that this rally could end in the near future. Since March 12, the SPY is about 1.10, a little less than .75%. In that same time, the VIX has made exactly NO movement. Take a look at the VIX curve from March 12 vs. today:

chart
www.vixcentral.com
Click to Enlarge

It is incredible how similar the two curves are. If there is any difference, it’s that the current curve is slightly flatter, but barely. I might look at that as a hint, if there was any difference in the option market, potentially a much higher VIX might point toward some change.

chart
LivevolX® www.livevol.com
Click to Enlarge

VIX IV is actually a touch lower than it was last month, despite all the upside open interest. Skew is also slightly flatter in VIX options, although only marginally. So what does all this mean? I think it points toward the market staying slow, grinding higher, and a trip north of 1575.

The Trade
It's hard to want to go short premium, or long premium, kind of a tough bind. This means a call vertical or butterfly probably makes some sense. This also means VXX is probably going to drop another two bucks between now and next month.

By Mark Sebastian, Blogger and Contributor, OptionPit.com

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