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

Hey Traders,

SPX broke out on Tuesday, dropping over 65 points. This was its biggest move in over a month.

The VIX also broke out running above 19 for most of the day before closing at 18.76.

VIX is back to levels not seen since April 11th.

Now, I think VIX is in a cyclical decline and is eventually going to be at 12.

But that doesn’t mean it will be a smooth ride lower.

The SPX will get overbought and pull back, and the VIX will have periods where it moves higher.

The key is that the moves higher will be weaker than the moves lower for VIX.

With Tuesday’s move, I think we’re set up for a move lower over the next few days, even with the great earnings from MSFT and GOOGL.

Over the next few days, likely through earnings season, I think the play is to lean short and look for the SPX to head back toward 4000ish.

If I am wrong, May puts are super cheap despite the high VVIX. The upside active in VIX options has mostly come from September and beyond.

At the same time, as we drop I think long term bear plays on VIX will pay through July.

Once we get to 12ish though, that sets up the final piece of the puzzle for a Gamma Bomb.

Something I am prepping for … and you should be too.

Questions about that? Comment below!

Your Only Option,

Mark Sebastian