Attack The VIX Either Way

Sample TextThe Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.

Hey Traders,

Well, needless to say I did NOT add to any VIX short position on Thursday.

The disadvantage of sometimes writing these at night is I am trying to gauge what might happen in the morning.

And on Thursday, the VIX popped.

It was already up on the day, and then there was the awful bombing in Kabul.

Add in a sprinkle of Jerome Powell speaking at 9 AM ET, and we have a recipe for the VIX to pop.

Here is the good news, by the open Friday, we will know what the VIX is doing …

But that does not mean we can’t game plan before then …

Here is how to attack the VIX either way today …

Binary events (events that trigger big moves) are somewhat rare in the market.

You might say non-farms payrolls are a binary event sometimes …

Although of late, it’s been “bad news is good news” and “good news is ALSO good news” …

This is because of the Fed.

Up until now, Jerome Powell has been (FOMC conferences aside) a pretty big tailwind for the markets.

But now … we are getting ready for tapering.

We all know it’s coming.

The question is just when … and how.

This is what makes Mr. Powell’s speech today so important.

There are two scenarios:

  1.  The Bandaid Rip: In this case, I would expect the VIX to pop for a day or two (a ‘taper tantrum,’ if you will). 

We could see VIX make a quick run over 20 before it recedes sometime next week. In this scenario, I would want to own short-dated calls in VIX.

If we move hard enough to turn the VIX futures curve flat or backwards, I might even look at iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) calls.

  1. The Dove: In this case, we could see VIX drop like a stone.

We could see VIX make a run at 16 or lower if J-Pow sounds dovish. I would want to own puts on ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) that expire today or on September 3rd.

Again, binary.

This is why VVIX — the VIX of the VIX — (which again failed to close below 110) got such a pop:

Heading into today, VXX, which represents a rolling 30-day VIX future, is looking for a pretty big move.

With VXX trading 27.25, the 27-27.5 strangle is pricing about $0.90.

That would mean the market is looking for a move of about 1.15 TODAY.

VIX was up 2 points on Thursday, and VXX moved up 1.12, to put this in perspective.

This means that traders think VIX could move at least 2 points in either direction.

I’ll be on shortly with my Trading Legion and Pro Crew talking markets at 11 ET time like I do every Friday in our chat room.

It should be fun, AND I should have a clear trade by then.

If you want to join us, you need to call (888) 872-3301 before then.

Your Only Option,

Mark Sebastian

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