The Option Pit VIX Traffic Light Is Red: Volatility is likely to be stable or drop.

Hey Traders,

The S&P 500 (Ticker: SPX) rallied nearly 64 points on Wednesday.  

This represents a move 1.56% higher …

I mentioned on Tuesday that VIX is currently pricing in moves of that size.

The VIX closed at 21.95 on Wednesday, which is not as low as Friday, but considering Friday was going into a weekend, it is pretty much at near-term lows.

With the S&P 500 rallying hard, money was hitting the exit on hedges.

You can see the move VIX futures made on Wednesday in the graphic below:

VIX is essentially back on the July path now.

We are in a position to see VIX go to 20 or lower …

But will it happen?

As the vol futures dropped, Big Money was buying VIX calls:

The answer is that I do not know where VIX is going next … but my Option Pit VIX Traffic Light is red … so that is the way to play it.

I would be a buyer of VIX puts. Specifically, the 20-strike puts cost $0.10

I would hedge, too, but on a ratio where I am leaning heavily short.

Your Only Option,

Mark Sebastian