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The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To be Stable or Drop.

Hey Traders,

The market still has a lot of potential landmines in front of it.

But for now, it appears that the general direction of the market is going to be higher, not lower.

The reason for the volatility drop is that we have a lot of known unknowns.

But … not a lot of fear for unknown unknowns.

I know it sounds silly, but this is the way the market works.

The Option Pit VIX Traffic Light is now red … so we are in the clear, right?

Wrong.

But for now, volatility positions should lean short.

The VIX futures curve has a huge contango (futures trading higher over spot VIX):

VIX itself got smoked harder than you think. 

Remember, yesterday was a Monday. VIX should be up about 0.75 points, all other things being equal.

Instead the VIX is a teenager again closing at 19.63, down 1.18 points.

So how should you trade it?

I would be buying puts and put spreads in the VIX itself, with a small hedge on.

For iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) – which saw a massive short squeeze on Monday morning …

I like put butterflies with a hedge.

I would buy cheap out-of-the-money puts in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) with how big the contango is in VIX futures.

Also, 1x Short VIX Futures ETF Fund (Ticker: SVIX) and 2x Long VIX Futures ETF Fund (Ticker: UVIX) will be launching soon. I’ll have a breakdown on those in the near future.

Your Only Option,

Mark Sebastian

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