The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Hey Traders,

While the S&P 500 (Ticker: SPX) has moved up and down a lot over the past month, the net price of the index has remained relatively flat.

One-month SPX chart, courtesy StockCharts

But inside the index, there have been pockets where one can do really well trading cheap implied volatility (IV).

Going through the movers and the shakers, I have found what I think are the most underpriced options in the entire S&P 500!

Let me explain what I am seeing, and how to play it …

WTI crude oil broke $70 a barrel on Monday.

One would think this would be big news, and traders would be buying up options …

One would think, but take a look at the CBOE Crude Oil Volatility Index (Ticker: OVX):

With oil near a more-than-two-year high, options on United States Oil Fund (Ticker: USO) and WTI are dirt cheap.

The same holds true for Energy Select Sector SPDR Fund (Ticker: XLE).

Take a look at CBOE Energy Sector ETF Volatility Index (Ticker: VXXLE), the VIX of XLE options:

Premium on XLE, and thus its components, is near the low for the year …

Right as these names are really starting to break out.

Knowing that the premium is cheap, I want to own call options on the energy names I like …

I am liking long calls in Exxon Mobil (Ticker: XOM), Chevron (Ticker: CVX), Marathon Oil (Ticker: MRO), and Energy Transfer (Ticker: ET).

ET in particular looks like it might be heading for a breakout over the coming days … I am looking for a new 52-week high in that one …

Just as the options are near the cheapest they have been all year.

The VIX Light remains red.

Your Only Option,

Mark Sebastian