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

Hey Traders,

The S&P 500 closed up 23.02 points on Thursday after threatening to go red.

The VIX at one point was nicely positive before it closed the day down by .1 points.

VIX futures were actually up a touch.

Why?

Because traders know we have a massive event coming up today.

Most of the time it’s a bit of an afterthought, but this time it matters.

What is this event?

The JPM Roll!

JPM runs a Hedged Equity Fund (Ticker: JHEQX).

The product is long the market and long an out of the money put spread that is financed by a short out of the money call.

Normally this doesn’t make a difference because the market is nowhere near the calls or puts in the spread.

But this time is different … JPM’s short call is the March 31st 4065 calls.

That open interest is all the JPM product.

Those calls have a 36 delta!

That means that market makers are short about 325,000 futures against a position that is either going to go out worth zero or in the money.

Today, JPM will close and roll.

They will buy back that call and roll into a new collar.

Based on closing prices, they will sell the 4255 call on Friday.

That’s about a 15 delta.

But what if we rally into the open? 

The delta of the 4065 will go up, but the delta of the hedge will not.

Market makers are going to be trading up a storm!

Futures are going to move.

So how do you trade it?

When the print happens market makers are going to have to buy a lot of futures (probably).

That might be the top of the market …

We are heading into the quarter end; the hedge is rolling, and VIX started to tip its hand on Thursday that maybe things were stretched.

It’s time to prepare for a trip back to the 200 DMA.

I would be long SPX strangles and long the April 19 puts in VIX.

Questions about that? Comment below!

Your Only Option,

Mark Sebastian