Option trader Mark Sebastian, of OptionPit.com, discusses the recovery the VIX had on Tuesday on a mild sell-off and what this—coupled with the huge move in VVIX—could indicate that the market thinks there's still good odds of moving forward.
Traders have short memories, but not that short. The VIX had a nice recovery Tuesday on what was really a mild sell-off. Down 13 bucks is only about .7%. The VIX though popped up 1.5% back over 17. This means the market thinks there is still good odds for a lot more 1% daily moves plus. I would note that the curve is still in contango. What's interesting, maybe even more than VIX itself was the huge move in VVIX. The VVIX popped 10% to nearly 100 again.
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It appears that VIX got low enough and VIX futures got low enough that traders wanted to buy upside calls in VIX again. Volume was also heavy at over 1.2 million contracts. The biggest trade being the November 30/40 call spread.
The Lesson: When levels get cheap enough, traders will buy options in just about anything, including VIX.
The Trade: This may be a chance to fade vol premium again. With VIX futures in contango and VIX above 17...and VVIX near 100, VIX options look a little ripe.
By Mark Sebastian, Blogger and Contributor, OptionPit.com
