Option trader Mark Sebastian, of OptionPit.com, compares the recent action of the volatility index in relation to the SPX 500 and explains why he always looks for divergence (times where the SPX is low and the VIX is also low) and the options spread for traders to keep an eye on moving forward.
If VIX is the 'fear index' (it isn't), then Monday was actually quite worry free. While the SPX gave away almost 2%, the VIX barely moved rallying only a touch over 2 points and settling below 20. Recall that coming off a weekend, the VIX should be higher by .75-1% anyway. What does this spell? Take a look at the chart. When I am watching VIX and SPX, I always look for divergence...times where the SPX is low and the VIX is low too.
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Notice the SPX was near session lows and the VIX was about 2 points below its high. Not exactly panic in the streets. This points toward a market that is somewhat priced in for today's move, and really, any move in the 1% range.
The Trade
Futures are currently backward, not a time to be short vol. But keep an eye on Jan-Feb spread, that goes negative, I think it might be time to jump in with UVXY.
By Mark Sebastian, Blogger and Contributor, OptionPit.com
