VIX Pointing Toward More Selling

10/14/2014 8:00 am EST

Focus: OPTIONS

Mark Sebastian

Founder, OptionPit.com

Mark Sebastian of OptionPit.com highlights the one time when the expected payout of selling VIX futures or options is not that great, and—based on the VIX curve—why he feels that holding off on VIX call spreads right now might not be a bad idea.

Generally speaking, when the VIX is high, it’s a sale and when it’s low, it’s also a sale.  However, there is one time where the expected payout of selling VIX futures or options is not that great, when the VIX curve starts to do this:

chart
www.vixcentral.com
Click to Enlarge

The curve has still not completely bought into this selloff being somewhat extended.  However, it is getting dangerously close to being in all out ‘backwardation,’  if the curve shifts so that November is over January (December will probably stay below January until it becomes a front month future) that will be the sign that the market is fully bought in.  Additionally, there is another stat that is worriesome: IV is underpriced.

chart
LivevolX® www.livevol.com
Click to Enlarge

When vol is playing catch up with realized volatility that is usually a sign that there is more selling coming.  I think we have just that on the way, the 200-Day will probably get sliced on Monday officially and with that we might see a 25 VIX.  That said, once everyone gets close to a 10% correction, the buyers will probably step in.  I also think there might be a change in Fed language.

The Trade

I think I would start looking to sell puts around the 1800 or 1825 level at the peak of panic on Monday.  I also might consider some sort of bear time spread or simply long puts.  I would hold off on VIX call spreads.

By Mark Sebastian, Blogger and Contributor, OptionPit.com

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