The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to swing wildly.

Hey Traders,

The S&P 500 (Ticker: SPX) blew higher on Friday, rallying over 100 points into the close.

With that, we saw the VIX slip further into contango (futures trading over spot VIX):

VIX is now in a pretty decent contango all the way out to December.

There are decent odds that we could see the S&P 500 make a run back to 4,300 at this point:

That would be the high from early May, and put the SPX right against the 50-day moving average.

Furthering that argument is the VIX of VIX, VVIX, which is now at a multi-year low:

VVIX could legitimately break 90 if the S&P 500 continues to rally.

While VVIX is dropping, the market is likely to be rocking …

And looking at VIX options, on Friday we saw huge buyers of the VIX June 24-strike puts and the 22-strike puts.

The June VIX 22-strike puts were $0.10 on Wednesday. They are now at $0.25, and could balloon to over $0.50 if the VIX gets to 22 again (which appears to be a real possibility).

I am not sure we are going to settle below 20, but at this point, the 20-strike puts cost $0.05.  I think they will trade at least $0.10 to $0.15 before VIX makes a decision to move higher.

I would buy a bunch of these lotto tickets if Tuesday is green, and then use some of the quick profits (assuming I can sell these at $0.15 this week) to buy some 25-35 call spreads.

Your Only Option,

Mark Sebastian