Best Of Both Worlds

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

Hey Traders,

On Monday the S&P 500 took it on the chin dropping 1.79% to 3998.84,  breaking back below the 200 Day Moving Average.

The VIX for its part had a decent rally of 1.69 points to 20.75.

But the truth is nothing has changed…all the noise that has made this market seem aimless are still in effect.

However… that does not mean there’s no opportunity.

What if I told you that there was a trade that had edge in it that will make money if IV sinks or if VIX pops?

Cause there is one…

Check out the VIX curve:

With more than 2 weeks to go, VIX Dec futures are trading .80 points above the cash index…

At the same time, Januaures are trading at 3.50 points above the cash index.

Normally at this point, we should see Dec about 1-1.5 points above the cash,  and Jan a touch less than 3.00.

Basically Dec is too cheap and Jan is too expensive.

So here is the two scenarios:

  1. VIX blows higher,  long Dec pays while Jan underperforms on a rally.

  2. VIX drops and as Dec rolls off a lot of pressure gets put on the January future.

Thus the current play I see is to be long December options and short Jan with a slightly heavy lean short January.

Your Only Option,

Mark Sebastian

Mark Sebastian

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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About the Author

Mark Sebastian

Mark Sebastian

Former CBOE floor trader and CIO at Karman Line Capital. Author of ‘The Option Traders Hedge Fund’ with over 30 years of options trading experience.

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