The Option Pit VIX Traffic Light Is Green: Volatility Is Likely To Stay Elevated.

Hey Traders,

On Tuesday the VIX was down 1.94 points to 29.83 …

ProShares VIX Short-Term Futures ETF (Ticker: VIXY) was down 3.29% to 21.47.

ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) was down 4.36% to 19.97

And then there was iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX), which after a WILD ride ended the day essentially flat.

Here is what happened, why it happened, and how to play it …

On Wednesday, with the VIX falling, and the major VIX ETPs getting crushed, we watched VXX do this:

The answer: Barclays suspended ETN issuance because of hitting certain position limits in the futures.

With that happened, VXX experienced the mother of all squeezes on in the morning.

Then as the day progressed, VXX slowly normalized.

With a closing price of 28.70, the ETN is still trading at a huge premium to fair value … but is much closer than it was when it broke 40.

Using the calculations Barclays puts out, VXX should have closed down about 3% and should be trading close to 25 … NOT 29.

That is a huge spread between fair value and trading price.

It is important to note, that this is not a stock, this is a basket of futures, the price should track the holdings, just like an ETF.

We saw something similar several years back in TVIX when that ETP was going crazy.

While it is possible Barclays delists VXX, I doubt it, the ETN does a ton of volume and is a wild success. That is a risk.

But, if that does not happen … heck even if it does, VXX will eventually normalize.

So should you go crazy buying puts?

No.

Take a look at the implied volatility (IV):

VXX options are trading about as high as they can trade.

So if you buy naked puts, you might get WORKED by vega.

So the only way to play it is to spread.

What is the spread to trade? I’ll be putting out a trade for Volatility Edge soon …

Your Only Option,

Mark Sebastian