Hey Trader,

On Wednesday the S&P 500 dropped 41.75 points.   The VIX rallied to 15.12.

The VIX is now back into Zone 2 after spending the last week plus in Zone 1 (you can read about the zones here,  direct people to our VIX fear gauge download)

Zone 2 means that the VIX is trading above 15 but below 19….its an area where volatility could crater again or take off.

It is a spot of uncertainty.

Yet when we dive deep down into SPX options a different picture forms.

You all know I love 0 DTE options (options with less than 1 day to expire)…

I like to trade them the day of…but more recently I have been liking the effect they have had on the options around them.

What do I mean by this?

On Wednesday the SPX broke support of 4430.  If we see any follow-through on Thursday SPX could be heading to 4350 quickly.

Yet look at the cost of SPX options.

As I am writing this,  S&P 500 futures are down about 12 points from Wednesday’s close putting the ATM option at 4390.

Check out the 2-day straddle price:

At under 41 dollars,  the straddle price is less than the move we saw on Wednesday alone…AFTER we have broken support.

Going out to October 2nd,  12 days away…the straddle price is about 81 bucks:

With an IV of 12.5…

0 DTE option sellers are crushing options whether we move or not and the effect is felt all the way out several weeks…basically until we hit monthly options.

Meanwhile,  the VIX curve is still in a really steep contango…

October futures have pushed up to 16.46 and might still be too cheap.

But given where the near-term straddle prices are….they are overpriced.

I would be buying strangles and shorting VIX…

That trade is going to pay and I will be implementing a trade around this in my Trading Desk service today.