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

Hey Traders,

On Wednesday, the market gave traders a ride.

First, it sold off. Then it rallied and appeared to be heading WAY higher. Then it tanked again before getting a small bid into the close.

During that time, the VIX had a huge range. It got as high as 19.42 and as low as 17.87.  

VIX futures followed suit with a huge range, as well.

So what do you make of this movement in VIX and the SPX?

Looking at the movement on Wednesday, the answer is pretty clear.

The market is on edge, but also looking for vol to drop.

Just look at the movement from Wednesday … VIX blew higher, took a dive, then blew higher again.

The movement from Wednesday creates a clear picture: Everyone is worried … but no one wants to be left holding the long vol bag.

Essentially, the market is worried the VIX is going to blow up, but won’t believe it until it happens.

So how do you play this?

The answer is long gamma.

Despite the close range the SPX has had the past few days (ignoring Tuesday), the cost of a straddle for those that manage the deltas has not been expensive.

Take a look at the straddle price for SPX expiring Friday afternoon …

They are pricing in about a $39 move.

We have META, AMZN, XOM, CVX earnings and PCE between now and then.

If you buy this straddle and trade the deltas around it you will make money.

But the average retail trader is probably NOT scalping gamma.

For the week, if you look at how strong MSFT and GOOGL earnings were and the fact that the S&P 500 ended down … you have to lean short.

I would be long cheap out of the money put butterflies.

Questions about that? Comment below!

Your Only Option,

Mark Sebastian