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

Hey Traders,

On Tuesday, the S&P 500 (Ticker: SPX) rallied 105 points.

This is the biggest move – up or down – since June 13th.

Not intraday, but close-to-close.

Yet the VIX only fell 0.80 points.

Why?

First, remember that volatility is movement up or down, and the 103-point move we saw on Tuesday was 2.75%.

That would be good for a VIX over 32!

But that is just part of the reason.

Secondly, hard rallies have been harbingers of short-lived success lately:

On the heels of a really hard rally, the longest sustained success we have seen has been five days.

Now there are some reasons to be hopeful …

The previous two lows have been higher than the low we saw in mid-June – that is a good thing.

The rally was also broad across almost every sector …

But …

The fact that we were up 100 points and the VIX was only down 0.80 essentially means volatility was flat-to-maybe-up.

This means there was actually a bid for options.

The two largest trades of the day in SPX were puts:

(Add a zero to put those in SPDR S&P 500 ETF (Ticker: SPY) equivalent!).

In the Invesco QQQ Trust (Ticker: QQQ):

The same thing …

Now, I am not saying we can’t keep going higher.

The key is to watch Apple (Ticker: AAPL).

If AAPL is rallying, so is the market. When it falls, so does the market.

Money is so concentrated in AAPL right now as a safe haven that if that falters, we could see blood.

For now …

I think short-term, short vol can work.

I would be a buyer of the Aug. 23-strike puts, and I would hedge them.

Alternatively a bull call in SPX hedged with VIX could also play well.

Your Only Option,

Mark Sebastian