The Option Pit VIX Traffic Light Is Green: Volatility is likely to go up.

Hey Traders,

On Wednesday, the S&P 500 (Ticker: SPX) closed down four points …

An ‘inside’ day would be what many traders would call it.

What caught my eye though was an interesting trade … 

One unlikely to work …

But one I like anyway.

That’s the thing about trading. Sometimes a trade that is probably NOT going to work can be a great trade.

On Wednesday the VIX closed below 29, as the SPX gave away less than five points.

But the VIX itself was less interesting than this really large, really cheap VIX trade.

A trader bought nearly 100,000 of the July 21 puts for $0.04.

This trade is unlikely to win.

The 21-handle is still about 8 points away from the current VIX level.

Even though the trade will probably not work, I REALLY like it.

Why?

It’s all about risk/reward.

The trader is betting about $380,000 on this play…

$380,000 that is likely to be worth $0.

However, heading into the 4th of July, and into one of the slower times for the market, the VIX COULD get a beating.

If that happens, these puts will quickly grow to $0.10 or $0.15.

The trader could then take off some of his or her position and ride the rest lower to see if they can hit the jackpot.

$380,000 could become several million if VIX makes a run below 20 in the next two weeks… something it has done several times this year.

As a play, when looking at risk/reward … I like this.

I would rather buy the 24s for $0.50 though and look for a move toward the 25-handle, selling the puts at $0.80-$1.00.

Then, I would use those profits to buy calls and call flies as I do not think long term the selling is over.

Your Only Option,

Mark Sebastian