Option trader Mark Sebastian, of OptionPit.com, illustrates that—despite the fact that VIX futures were pretty much flat on the day and the VXV was down—the volatility curve actually steepened Monday; Mark also outlines why he is on hold for the next couple of days, at least "until the Fed stops this stupid little dance."
Interestingly, despite the VIX futures being pretty much flat on the day and VXV being down, the curve actually steepened Monday. Notice we are still extremely backward:
www.VIXCentral.com
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In addition, realized volatility is completely tanking. Now that last Monday is going to fall off, 10-day HV is going to be below the VIX level. That's a sign that we are absolutely on hold here for the next couple of days. Also a sign that—from a market cycle standpoint—we are possibly going to go lower from here. Until the Fed stops this stupid little dance, we are caught.
The Lesson:
Lower IV doesn't always mean safer.
The Trade:
I think there is a strong chance that VIX pins 25 at expiration with the Fed decision now on Thursday. In the meantime, despite VIX Oct Futures being down Monday, I think it will creep higher, a 20/25/30 fly makes some sense over the next couple of days. Especially VVIX is going to drop over the next few days.
By Mark Sebastian, Blogger and Contributor, OptionPit.com
