The Option Pit VIX Traffic Light Is Green: Volatility Is Likely To Go Up.

Hey Traders,

Well, it happened …

The S&P 500 (Ticker: SPX) closed in official bear market territory.

And the index hit my first downside target at 3,750.

Now the question is … will it hit the next one?

I have been following breaks of the SPX 50-day moving average to find out where we could see some buying action step in.

The next major break after 3,750 is all the way down at 3,400 …

That’s another 10% lower.

Can we get there?

Well, according to VIX …

The answer is yes.

As the market tanked on Monday, the VIX curve reentered backwardation, with futures trading below spot.

We also failed to see any real removal of hedges as well. 

If we were toppy in VIX, we might see the selling of some of the 75-strike calls that traders are currently quite long in.

Instead, we just saw a lot of call buying:

I would note that on other big down days, we have actually seen traders buying puts…

That did not happen this time.

Instead they simply went long vol.

I think we could be heading to 40.

I would be a buyer of the June 35-strike calls as a day trade if the market heads down … 

Because there is some serious fear out there.

Oh, and check out Bitvol, the VIX of bitcoin …

Keep an eye on Bitcoin. It is getting smoked, and could cause some serious liquidity issues across markets.

Your Only Option,

Mark Sebastian