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

Hey Traders,

The VIX closed down on the day on Wednesday…

This is the fifth down day for the VIX in as many days (adjusted for the long weekend, of course).

At the same time, the VVIX (VIX of VIX) is tanking; it is now at the lowest level in years.

So what is next?

The S&P 500 (Ticker: SPX) has been down for the last two days, yet VIX is falling?

Isn’t this how a buyable bottom is formed?

Let’s dive in. 

The VIX closed on Wednesday at 25.68, it’s lowest close since May 4.

The VVIX took it on the chin, and it is now threatening to break into the 80s!

This means VIX options are getting cheap.

We have seen the S&P 500 sell off and the VIX sell off for a couple of days now.

Could we be forming a bottom?

Should traders go long?

To start with, there is still a ton of WAY out-of-the-money crash protection being bought:

On Wednesday traders bought a huge chunk of the Sep 60-strike calls.

As of Wednesday night, the total open interest on the 75-strike out to October was 725,000 contracts.

What is interesting is that traders are not buying the 30s and 25s for protection … they are going way out of the money.

So what does this mean?

We legitimately could see a rally here.

But traders also feel like there is a serious chance of a major correction..

Time will tell.

For now I like owning the 22-strike puts, and hedging on a ratio with call spreads for June.

Your Only Option,

Mark Sebastian