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

Hey Traders,

For a second there, the Option Pit VIX Traffic Light was red.

But then … Monday happened.

The S&P 500 (Ticker: SPX) went from “up 30” to close down more than 30 points. In the process, the intraday movement was nearly 80 points.

The VIX curve, in spite of the Monday turnaround, is still in a nice contango:

But other than that, most of my indicators started to move higher.

Like we talked about yesterday … take a look at VVIX, the VIX of VIX:

As VIX was threatening new recent lows … VVIX has begun to crawl higher.

During Monday’s trading session, we should have seen the action coming. Even as markets were near the highs, VIX futures were not down on the day.

So where to next?

We could be seeing the last gasp of volatility …

But more likely we see lots of chop and then we hit the Fed …

The FOMC meetings have been a “risk off” events.

Traders appear to be setting up for this.

The largest trades the last few days have been calls.

On Monday, we saw a trader put up a huge risk reversal:

The trader bought puts, sold calls, and bought futures (the 7,732 lot is a combo, which imitated a future).

This trade generally is looking for vol to go higher.

I think the play is to own August puts in a name like ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) or UVIX 2x Long VIX Futures ETF Fund (Ticker: UVIX), and own call spreads in VIX itself for August and September.

Your Only Option,

Mark Sebastian