Something Shiny That Could Be the Real Thing

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Hey Traders,


We have a host of amazing traders here at Option Pit …


Among that group is veteran bond trader Bill Griffo and his Power Income letter.


Griff has been saying for months that there is a boatload of inflation heading our way.


And let’s think about the headlines we’re seeing all around today …


Driver shortages, staffing shortages at restaurants, and rising prices in food, lumber, housing, gas and metals …


You name it … and the price is rising!


This has me interested in SPDR Gold Trust (Ticker: GLD).


Gold has traditionally been a major store of wealth when inflation hits the U.S.


While it has yet to react so far, it appears that a breakout is starting form …



Now what really surprised me is where the CBOE Gold Volatility Index (Ticker: GVZ) is trading.

GVZ is the VIX index methodology on GLD options.

Take a look:

While GVZ is getting a bit of a pop today, the index is still
really inexpensive.

This makes me want to buy calls — because the option prices are cheap.

June 170 calls, which are at the money, are glittering at just $3.20. And GLD is up about 2.50 as of this writing.

The Option Pit VIX Light Is Red,
and Volatility Is Likely to Drop.

Your Only Option,

Mark Sebastian

Lots of Movement, But No Change


The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.


Hey Traders,


Tuesday looked very ugly for a little bit.


      • The VIX was over 21 — and zooming higher.
      • Meanwhile, the S&P 500 was down 60.
      • And VVIX — the volatility of VIX — was booming.


All that — yet no change in my Option Pit VIX Light — the proprietary indicator that guides my volatility trading.


It started to get close to a move, but never made the switch.


The reason why is important for almost all indicators that are supposed to sense a change in trend …


They should not be reactionary.


The VIX traffic light takes into account four sub-indicators:


      • The VIX Curve
      • VIX Correlation
      • VIX Volatility
      • Volatility of VIX options — the aforementioned VVIX 


The traffic light would have 100% turned yellow if we had closed at mid-day


We had a flattened VIX curve, with the cash and the VIX May future pretty much on top of each other.


But by the close ….



That, friends, is contango — futures price higher than the spot price — and it’s a red light for VIX futures (the most important sub-indicator).


Also remember what a red light means …


      • Red: The market is falling or staying stable. You can create a trading system and run your normal risk approaches. For instance, the light will be red during a contango market (that's when the forward price is higher than the spot price — not a lot of worry in the market!).


Now, elsewhere, we had the VVIX skyrocketing. I mean, look at the candle from Tuesday:



At the highs, the VVIX was showing a yellow, or even a green light (which, if that comes, buckle up.)


But where VVIX closed? Still red, although inching toward yellow.


VIX correlation was a little different. This is the one sub-indicator that actually turned yellow and has me on edge.


We are not seeing the VIX sell off much on rallies — but it is launching higher on selloffs.


Since April expiration, SPX is higher and so is the VIX:



If there’s one thing that is concerning — and I think points to the VIX being kind of stuck in a holding pattern — it’s VIX correlation.


I would also note that VIX volatility itself is picking up a touch from the lows, but it’s nowhere near breaking out yet:



The Takeaway


Despite the selloff, at the end of the day, I had three reds and one yellow sub-indicator — that produces an overall red light (but one with a touch of an orange hue to it).


I am putting on a few small hedges here and there, but I am not putting on my major hedging programs.


I am also looking for spots to get short volatility.


Your Only Option,


Mark Sebastian

The $500K Bet on a Space Stock Floor

Hey Traders,

Wall Street is chock-full of eccentric visionaries, including two who are battling in the race for space tourism: Richard Branson and Elon Musk.

Branson heads up Virgin Galactic (Ticker: SPCE) and Musk is the notoriously blunt-smoking head of Tesla (Ticker: TSLA) and SpaceX.

After dropping nearly 18% in March, SPCE stock went on to lose another roughly 28% in April, and is testing year-to-date lows.

TSLA stock, on the other hand, is well off its February peak, but not nearly as significantly as SPCE.

And while Tesla has been attracting attention ahead of Elon Musk’s upcoming “Saturday Night Live” hosting gig …

Virgin Galactic stock has been attracting what appears to be institutional investors betting on a floor for SPCE on the charts.

So today, let’s dive into the big-money order flow that caught my eye yesterday …

Big-Money Trader Expects the SPCE Bleeding to Stop

SPCE shares peaked north of $60 in February, but have since given up about two-thirds of that to flirt with the round-number $20 level.

As a result, the stock’s 14-day Relative Strength Index (RSI) is just under 33 — on the cusp of “oversold” territory (generally considered a reading under 30).

SPCE daily chart w/ 14-day RSI – courtesy of StockCharts

Perhaps that oversold reading is why SPCE on Tuesday attracted a massive option trade betting on short-term support.

Specifically, it looks like the trader may have sold to open a little more than 7,500 contracts of the 17-strike put expiring on Friday, May 21, for 67 cents apiece, or $67 (since each option controls 100 shares).

SPCE option trade on May 4, 2021 – courtesy of Trade-Alert

For all the new kids out there, let me break this down even further:

When you BUY a put to open, you’re usually betting the stock will fall beneath the strike within the option’s lifetime.

But when you SELL a put to open, you’re taking the opposite side of the buyer’s trade.

That means you expect the underlying stock to stay above that sold strike — $17, in this case — through the option’s lifetime.

In the case of SPCE, the big-money seller will be able to retain most or all of the initial net credit received to open the trade — $67 a contract, or $503,572 ($67 x number of contracts).

Yes, as long as SPCE stock doesn’t breach $17 — territory not explored since October — in the next couple weeks, this institutional option seller can pocket about HALF A MILL.

However, put selling certainly comes with heavy risk, which would increase the steeper SPCE should fall beneath $17 by the close on May 21 (expiration day).

Even more risky? Selling options ahead of a known event — which could be a volatility catalyst — like earnings, which Virgin Galactic is slated to report on May 10.

But again, perhaps the seller thinks the recent SPCE sell-off is overdone, and that the bleeding will stop soon … or at least north of $17.

Either way, with SPCE attracting big-league money in the option pit, I’ll be keeping an eye on this one to see if it also appears on my Robinhood Trader scanner, which could put it on my short list to trade.

Enjoy the rest of your week and good luck out there!

Your Only Option,

Mark Sebastian

When Will It All End??

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.


Hey Traders,


The Nasdaq-100 (Ticker: NDX) has been lethargic over the last few days.


Almost all the mega cap stocks have been sick since they reported earrings.


      • Amazon (Ticker: AMZN) is in an absolute free fall.
      • Apple (Ticker: AAPL) can’t catch a lift.
      • Advanced Micro Devices (Ticker: AMD) and Microsoft (Ticker: MSFT) … ouch and double-ouch!


Only Google (Ticker: GOOGL) and Facebook (Ticker: FB) seem to be getting out unscathed so far.


So when will this end? Is there upside in the near future?


Or is the NDX going to stop the S&P 500 (Ticker: SPX) from a rally on the “recovery trade?”


The answer lies in skew.


Skew Know What I Mean?


Skew is the relationship between out-of-the-money puts and out-of-the-money calls, relative to at-the-money implied volatility.


Got that?


Lucky for us, we have two indexes that can help us focus in on EXACTLY what skew is doing.


First, VOLQ is the at-the-money volatility index for QQQ, an exchange traded fund (ETF) that tracks NDX.


VOLQ tracks what eight strikes around the money are trading at from a volatility perspective.


The CBOE Nasdaq Volatility Index (Ticker: VXN), on the other hand, is the VIX of the NDX (which is the index form of QQQ).


So VXN doesn’t just look at eight strikes — it looks at every strike that has a bid.


I can hone in on exactly what skew looks like by subtracting the values.


When the spread is high, that’s a sign traders are hedging with OTM puts instead of ATM puts.


When the spread is low, it’s the opposite.


Let’s take a look at skew:



When skew is at its lowest, that is almost the exact point where NDX peaked.


Now skew is finally just starting to normalize … a sign that the selling is slowing a touch.


I think we SHOULD see this spread expand further. When it gets to 4 or 4.5, THAT is when I think the selling will subside. (It’s in the 3.25 range now.)




Because it’s a clear sign that market participants are sufficiently scared enough that they are putting on a bunch of hedges.


The Takeaway


In short, we probably have a few more days of selling — but I think the bloodletting in the NDX is starting to slow.


I’d start to look at QQQ calls, potentially on Wednesday.


The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.


Your Only Option,


Mark Sebastian

Tracking This Item VERY Closely

The Option Pit VIX Light Is Red, Volatility Is Likely to Drop.

Hey Traders,

The VIX futures curve remains in a nice contango, with the futures price higher than the spot price.

As you’ll notice below, VIX is trading at a tasty discount to May, the same from May to June and so on. It’s like the TrackMan tracer on PGA Tour golf coverage. You love to see it …

But the tenor seems to have changed a bit over the past couple of days.

And something is afoot that I don’t like …

Notably, take a look at the VIX itself. After falling consistently for two months, the index has stopped in its tracks:

VIX has bounced between 17 and 19 for about two weeks — which is hard on short volatility trades.

More important, to me, is the relationship between VIX and the S&P 500 (Ticker: SPX).

The VIX has been relatively strong as the SPX has climbed, especially since April expiration on the 19th of last month.

Since that time, the S&P is up marginally …  and the VIX is up significantly.

If the VIX was any stronger, the component of my traffic light that takes into account the correlation between SPX and VIX would turn yellow.

This is something I am watching.

While — for now — I continue to lean short volatility, I have certainly dialed back how aggressively I’m trading.

I’m also keeping a tight watch on adding a hedge.

There is a distinct possibility that the market could have a short term rollover and head back to 4,100.

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Your Only Option,

Mark Sebastian

This Sector Heats Up in May

Hey Traders,

If you’ve been in the stock game for a while, you’ve likely heard the famous expression, “Sell in May and go away.

In my experience (which is 20 years’ worth this summer, if you can believe that!), this saying is overdone, lacks nuance, and frankly, it’s just bad advice!

Sure, at one point in time, that seasonal adage carried water, so to speak … 

There were valid reasons for many traders to scrub their portfolios before summertime, and not circle back until fall.

However, things have changed on Wall Street — we’re in the midst of a market like we’ve never seen before.

I don’t just mean the changes we’ve seen since the pandemic, either, which has fueled an influx of fresh retail-trading meat over the past year …

Sell in May” turned stale long before the Robinhood army emerged.

So today, I’ll tell you why you should ignore this trading trope that just won’t die — and I’ll even show you there are plenty of opportunities to profit this month … IF you know where to look.

“Summer” is a Noun

There are various theories about the origin of the “Sell in May and go away” saying, but among the most common is this:

Once upon a time on Wall Street, the big-baller traders would unload stocks before taking their families to summer by the water somewhere. 

They didn’t want to spend a lengthy vacation having to worry about their portfolios, so they tried to put a bow on their trading before hitting the road — and collectively, this occasionally translated into a summer slump for stocks.

Hence, why Wall Street was told to sell in May, before the seasonal dip.

But these days, how many people do you know who “summer” anywhere? 

I mean, where I come from, “summer” is a noun, not a verb.

It’s safe to say we’re no longer in the Seven Year Itch era, with trains filled with brokers headed to Long Island or Cape Cod, still wearing wool suits despite the temperature …

After all, with the advent of air-conditioning, a 30th-floor loft in Manhattan and a subway ride to the financial district don’t feel quite as stifling in the July humidity.

Not to mention, the actual process of trading these days is much less taxing.

These days, speculating with stocks and options can be done from the comfort of our own homes, or even from our phones, as opposed to in person on the floor … 

All that considered, one can conclude that selling in May and going away is gone with the wind. 

This Sector Heats Up in May

As I said earlier, there are ALWAYS opportunities to make money playing stocks and options, if you’re nimble enough and know where to look.

In fact, if we were trading on seasonality alone, one sector has been a huge BUY in May …

Tech stocks.

The Technology Select Sector SPDR Fund (Ticker: XLK) is an exchange-traded fund (ETF) that essentially takes the temperature of big-cap tech.

Among its top holdings are Apple (Ticker: AAPL), Microsoft (Ticker: MSFT), Nvidia (Ticker: NVDA), and Intel (Ticker: INTC).

And wouldn’t you know it, had you been long the XLK every May since 2010, you would’ve outperformed the broader S&P 500 Index (Ticker: SPX) 82% of the time.

XLK vs. SPX since 2010 – courtesy of StockCharts

In fact, recent history indicates selling TECH in May and going away for the summer would be a bad idea …

May is tied with July and August for the XLK’s best month of the year vs. SPX, looking back about a decade. (June, on the other hand, has been the worst month vs. the rest of the market.)

In closing, I’ll be keeping an eye on this sector — and hunting opportunities in other industries — over the summer, and you should too.

Your Only Option,

Mark Sebastian

Stay in May and Give It a Weigh

Hey Traders,

Once again, I hope you had a profitable week and didn’t get sucked into paying up for a busted earnings trade.

Now, I don’t know about you, but I can’t believe it’s already May!

I’ll be coming to you soon with some of my favorite stocks and sectors for this month, but in the meantime, now is as good a time as any in the calendar year to do a portfolio check.

Kind of like how you get your temperature taken before entering various places these days, to make sure you’re virus-free … 

Now’s a great time to take the temperature of your trading.

Some hedge funds like to do quarterly channel checks, and “window dress” their portfolios so they look better for prospective investors, but I often like to step back and reflect on my personal trading at the one-third calendar marker — which is right now.

Instead of “Sell in May and go away” — a trite, outdated phrase, in my opinion — I prefer to “STAY in May and give it a WEIGH.”

After all, losing trades happen to the best of us, they’re part of the game, but the key to LONGEVITY in anything is LEARNING from your mistakes so you don’t repeat them.

So today, I’ll walk you through ways to evaluate — and hopefully improve — your trading for the remainder of the year.

Wallow in the Losers

Most of you have probably heard the saying, “The definition of insanity is doing the same thing over and over and expecting different results.” 

Well, that logic also applies in the trading game.

Of course, every stock is different, and every day in the markets is a new one with fresh undercurrents, so there’s NO winning strategy that’s literally repeatable when trading stocks and options.

If there were, I’d be doing that instead of writing to you!

But every trader has a bad habit or two they need to break.

This weekend, I encourage you to do some self-reflection — take a look at your trading so far in 2021, and do some postmortem analysis.

Take a gander at your losing trades, specifically, and try to identify where you went wrong, and how you might’ve adjusted to achieve a profit.

Sometimes it’s as simple as, “I made the wrong directional call.” 

Maybe you thought a few stocks would rally, so you bought call options just in time to see the shares nosedive.

If an underlying stock made a major move against you in early 2021, study the charts and see where it went wrong … 

Were there any technical signals that foretold the move? Perhaps a key moving-average cross you missed, or another level of support or resistance that went under your radar?

Hunt for chart patterns that may be playing out under your nose, then keep your eyes peeled the rest of the year.

Or, maybe some of your losers in the first few months of 2021 were due to NOT doing your due diligence

Maybe you just got lazy about checking the collective Wall Street calendar and made an ill-timed trade or two ahead of earnings — an easy habit to correct.

Not as easy to correct? Not doing your due diligence on your option strikes.

I’ve told you before that I like to shop around before committing to an option strike, and I rarely follow the crowd. 

Instead, I’m making trading decisions based on the raw data — like implied volatility (IV) — and my own technical analysis, because a lot of the time there’s a better “deal” than the strike attracting the rest of the Street.

Do a retrospective analysis of your strike selection — was there a better option that could’ve made you money?

Maybe if you’d bought the 97.50-strike call options, instead of the cheaper 100-strike calls … Or perhaps you would have fared better going out another week with your options expiration …

Study your losing option trades over the past few months … and try to spot any repeating pitfalls.

OR, maybe your Achilles heel is not knowing when to exit your trades.

Perhaps your long call on Stock XYZ would’ve made you money earlier this year, IF you hadn’t been so trigger-happy and cut losses too soon …

On the flip side, maybe it would’ve been profitable — or MORE profitable — had you hit the exit sooner, instead of letting GREED get the best of you (which also happens to all of us).

For me, at least, once a trade is up, I NEVER want it to become a loser, and sometimes I end up tapping out too quickly.

Fear and greed are dominant emotions when you have money on the line, and successfully keeping your head straight when you’re neck-deep in a tense trade requires a conscious effort — trust me, I know.

But recognizing these emotions when they come on is the first step to controlling them.

Whatever it is that’s holding you back from making more money, Traders, it’s key that you try to identify and overcome it!

After all, hindsight is 20/20 for a reason … but sometimes in order to put your best foot forward, you have to look back. 

Until next time!

Your Only Option,

Mark Sebastian

VIX Truth is Beyond the Headlines

The Option Pit VIX Light is Red, and Volatility Is Likely to Drop.


Hey Traders,


The S&P 500 (Ticker: SPX) had a really nice day on Thursday, closing up 28 points.


But that does not tell the story.


The real news from Thursday is what happened in the middle of the trading day …


The S&P took a mid-day dive and the VIX shot higher.


Take a look …



The VIX shot up with the S&P dropping — and never got back near the levels we saw early in the day.


At one point the VIX was heading toward 16 even — then it almost got to 19.


Clearly, the levels we are trading at are starting to create a wall of worry.


We also saw the VVIX (the VIX of the VIX) get a little pop:


Although I would point out that it didn’t take off, which, glass half-full (for the SPX), would mean we go higher.


But I am watching VIX closely here.


We are not near a yellow Option Pit VIX light yet — but we are not BURNING red anymore either.


As a quick reminder, the light is my proprietary indicator that guides my volatility trading …


        • Red: The market is falling or staying stable. You can create a trading system and run your normal risk approaches. For instance, the light will be red during a contango market (that’s when the forward price is higher than the spot price — not a lot of worry in the market!).
        • Yellow: The market could go either way. Not the best time for normal investing. Tap the brakes.
        • Green: It’s time to be hedged up and ready for ugliness and opportunity. As an example, the light will be green during backwardation. (That happens when the forward price is lower than the spot price. Fear is in the air!)


Despite not being bright red, the big paper was still bearish.


The biggest trade of the day was a VIX June 20-16 put 1 by 2,  with the customer buying 10,000 20 puts and selling 20,000 16 puts paying .80.


This is bearish VIX down to 12.80.


The point is, I saw a lot of mixed signals, some of which are troubling. I am not ready to say vol is going higher, but we could be in this range for a bit.


The Option Pit VIX Light is Red, and Volatility Is Likely to Drop.


Your Only Option


Mark Sebastian

Trade Flow Points to This …

The Option Pit VIX Light Is Red, and Volatility Will Drop.

Hey Traders,

Average daily volume in the VIX has ticked up to about 510,000 contracts per day after running below 500k for a few weeks there.

This increase in volume is firstly bullish stock on the CBOE.

However … Wednesday was NOT a busy day.

VIX options traded 359,755 contracts — well below the average daily volume.

And It could have been much worse …

But there was one month a group of strikes was active — VIX June puts.

Check it out …

Between the June 17, 16 and 15 puts, 100,859 options changed hands.

Almost all of these options were purchased by institutional customers, mostly in large block size.  

The biggest trade of the day was a buy of the June 16 puts for .29, the second was a buy of the 15 puts for .15.

The largest trading in puts outside of June was the May 17 puts, which also saw an influx of buyers. One trader alone bought 9,300 of the 17 puts for .44.

So what does all of this mean on a Federal Open Market Committee (FOMC) day?

The answer: Traders continue to position for the VIX to drop. 

In the May expiry, the only contract that has over 100,000 open is the 60 strike (good luck!).

Puts, on the other hand, have open interest exceeding 100,000 contracts on the 23, 21, 20, 18, 17 and 16 strike.

In June, open interest is over 100,000 on the June 50s (again, good luck) and the 16s and 15s.  

This type of trading action points toward an impending collapse in VIX to sub-15.

What’s It Mean for Me? (And You!)

Guess what? This would play directly in my hands!

Traders in the beefed-up Volatility Edge program know I bought the May 15 puts for .10 and .05 and that I am long the June 20-17-14 put butterfly.  

This also plays into the hands of the VXX trade I have been discussing over the last couple of days.

I fully expect them both to win. (And there’s still a chance for you to join me.)

Because Option Pit VIX Light Continues to Blare Red, and Volatility Is Very Likely to Drop.

Your Only Option,

Mark Sebastian