The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

Well, despite the VIX being up on Monday (weekend effect) …

VIX futures got sold.

As we head into expiration, the November future is trading at a full point premium to the cash …

Heading into two days where the VIX is statistically likely to drop.

So, heading into Wednesday, what are some potentially profitable expiration trades?

The VIX closed up 0.20 on Monday. When taking the weekend effect into account, we can call it essentially down …

How do I know? VIX futures.

While the VIX did close higher, VIX futures were down on Monday.

The November future is trading at a 1.01 premium to the index (really wide) …

December is trading at almost 4 points:

So how do we play it?

The easiest two trades come from November.

Take a look at this option chain for puts:

Let’s start with the November 17-strike puts.

They closed out $0.45-$0.50 (I mentioned in my Vol Edge live I thought they were a good buy when they were $0.25 Monday morning)…

The good news is they are probably a good purchase here.

They are 100% in the money vs the cash VIX, trading at parity …

This means if the VIX sits, they break even …

If the VIX drops, they win …

If the VIX rallies, they can lose …

It’s a coin flip, except we know that the VIX is more likely to sit or drop on a Tuesday than it is to run higher.

This is a trade I would look at strongly.

The other is the 16-strike puts.   

At $0.10 they are cheap, and if you think VIX can’t get to 15, take a gander at the drop from the 2nd to the 3rd of November in VIX:

These are a really inexpensive play on VIX getting smoked … the type that can pay out four-to-one (or more!) if VIX selling gets a head of steam.

Interestingly, I see even greater opportunities in December …

Where?

You know what you need to do …

Join me in Volatility Edge.

Your Only Option,

Mark Sebastian