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

Hey Traders,

The VIX closed below 20 for the third day in a row at 19.69.

Heading into expiration, the VIX is in a massive and steep contango.

This is a sign the market is still not in love with this market.

That said, the risk-reward on a Sept put or put spread matched with an upside hedge makes a ton of sense here.

If the SPX can continue higher or flat,  and VIX stays here, it will put huge pressure on September.

Even so, I would hedge any short going into options expiration as we have seen SPX options expiration cause the market to drop pretty darn quickly over the short period of time.

So … get short, but be protected.

And it's not just me noticing these trends …

Traders are setting up trades that can take advantage of the curve where it lies right now.

Like this behemoth that went up toward the end of the day Monday in October.

A trader sold the Oct 20 puts,  bought the October 50 calls and sold October futures delta neutral.

This trade will actually win if the VIX continues to hang around 20, but does even better if things blow higher.

It is the type of trade that makes sense in this market.

Here is what this trade looks like.

This is likely against a portfolio of somekind and designed to mitigate areas of risk.

While a hedge Sept short is not the same as hedging a massive portfolio, the approach is of the same mindset.

Make money, limit risk ..

Your Only Option,

Mark Sebastian