Here Is What Will Push VIX Lower (And How To Trade It)

Mark Sebastian

The Option Pit VIX Traffic Light Is Red: Volatility is likely to decline.

Hey Traders,

Consumer Price Index (CPI) and Producer Price Index (PPI) are out, and the market likes what it sees.

VIX got smoked on Wednesday.

That said, VIX seems to want to hover around 20 and not go lower:

After a huge rally, where the VIX falls, it is not unusual to see VIX get a little bit of a lift.

But the key is going to be what happens on Friday.

If the market rolls over, VIX will quickly move back to 23.

But if Friday is flattish or up, and VIX is down a decent amount, that sets up a GREAT convergence trade.

On the VIX futures curve, the spread between August and the cash VIX is still really wide:

If VIX stays around 20, the August futures have to fall, even if the VIX creeps up slightly.

This sets up a trade in the VIX August 21-strike puts.

With four trading days left and VIX at 20.20, I can buy the Aug 21/20-strike put spread for about $0.40.

That has great risk reward and will double by Monday if the VIX stays here or drops.

Your Only Option,

Mark Sebastian

VIX Edge

Mark Sebastian

Mark Sebastian is a former member of both the Chicago Board Options Exchange (CBOE) and the American Stock Exchange (AMEX), where he spent years mastering the art of options trading in the most competitive environment imaginable. As Chief Investment Officer at the hedge fund Karman Line Capital, Mark manages sophisticated options strategies for institutional clients. He is the author of two highly regarded books on options trading: ‘The Option Traders Hedge Fund’ and ‘Trading Options for Edge.’ Mark is a frequent guest on major financial networks including CNBC, Fox Business News, Bloomberg, and First Business News, where he provides expert commentary on market volatility and options strategies.

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