Underwhelming VIX Move, No VVIX Move

10/01/2015 8:00 am EST

Focus: OPTIONS

Mark Sebastian

Founder, OptionPit.com

When the VIX seems to be underperforming and VVIX is unchanged, one has to wonder what is going on, and option trader Mark Sebastian, of OptionPit.com, thinks that, generally speaking, it means that traders are not buying puts in the SPX and are not buying calls in the VIX. Mark also highlights what he thinks look extremely favorable right now for option traders.

On the week, the VIX, despite not panicking, is up substantially. The VVIX, which is the VIX of options on VIX has gone no where. When the VIX seems to be underperforming and VVIX is unchanged, one has to wonder what is going on. Generally speaking, it means that traders are not buying puts in the SPX and are not buying calls in the VIX. Thus, traders are in fact not hedging into this sell-off. The VIX move is likely more due to the change in strikes the calculation uses to derive itself than any large increase in true volatility. This is evident in the last of movement in VVIX.

chart
Click to Enlarge

In fact, based on the volume I am seeing, I would say that only a few people are actually selling stocks and most of the action in the SPX is put sellling. Now that we are close to the lows of August, there appear to be some brave souls that are willing to dip their toe in the premium selling game.

The Lesson:

VIX movement as a % doesn't matter, its magnitude relative to the move. If VVIX is unchanged when VIX is up, something is up, make sure VIX isn't only up because of price movement.

The Trade:

I think broken wing butterflies look extremely favorable right now.

By Mark Sebastian, Blogger and Contributor, OptionPit.com

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