Two Days of Selling … Now What?

The Option Pit VIX Light Is Yellow, and Volatility Will Move.

Hey There Traders,

The S&P 500 had a rough day on Wednesday.

The second in a row.

Over the course of two days, the SPX has given up 80 of the 90 points it made on Monday.

But what is volatility doing?

Remember, volatility is the best measure of fear.

When the VIX is bumping …

Traders are racing to hedge.

When it’s not …

The opposite is true.

What I See

Take a look at the charts below. S&P 500 is on top and VIX is on bottom:

What do you notice about the price action from Wednesday, relative to last week …

The answer is a complete lack of panic.

Could we be heading lower? At this point, it could be for a day or two.

But is the VIX acting like the world is about to end?

The answer is no.

So, while the selling today was certainly bad …

The VIX is kind of saying, “Meh.”

The “fear index” isn’t panicking or buying into the fact that there could be a huge downside move.

So, if you think we are going to tank, the good news is that hedging is still cheap …

But I am seeing a chart that says this is temporary and we are probably going to run higher soon.

My Move

I am a buyer of S&P 500 calls … hedged with a cheap VIX call or call spread like the VIX 30-490 call spread.

The Option Pit VIX Light Is Yellow, and Volatility Will Move.

Your Only Option,

Mark Sebastian

SPX Drops, VIX Yawns

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

Hey Traders,

The big indexes all got smoked yesterday.

The S&P fell almost 1%, while the NDX and the Russell 2000 dropped closer to 2%.

Yet I’m darn bullish heading into Wednesday’s trading …


Take a look at how the VIX curve moved on Tuesday:

What are we seeing?

The purple curve is the VIX curve close on Monday …

The blue is the same thing for Tuesday …

What do you notice?

The curve did NOT move.

With a 30-point drop in the S&P 500, an essentially flat curve signifies a VIX yaaawn at the selloff.

You see, the VIX places more emphasis on at-the-money options than out-of-the-money options …

The VIX curve not moving on that selling essentially signals flat, or even declining, volatility …

Even if the VIX itself read slightly higher.

I have said for a long time that the VIX futures traders are the smart guys in the room.

If they are not buying up futures on a down move like today, what does that mean for the market?

There was little appetite for hedging as the S&P 500 dropped and the NDX and RUT got smoked.

I view today’s price action as bullish the S&P 500 and am looking for a move well above 3900 for the week.

And with that, I still think we could see a sub-20 VIX.

Your Only Option,

Mark Sebastian

Is This Meme Stock About to Go Bust?

Hey Traders,

Since meme stocks started blowing up, I have put on winner after winner in our Robinhood Trader program (AMC, NOK, BB) …

Same in our Trading Legion mentoring service, where we put together a sweet RKT trade yesterday during our OP Markets Show.

I keep waiting for the bottom to drop out on some of these names but, NOK aside, we haven’t seen that yet.


Could that be changing?

Check out this MONSTER trade in BB on Tuesday …

A customer bought at least 100,000 of the BB March 12th expiry 5 puts for, get this

Two cents.

This trade was 100% opening, as the open interest on this strike before yesterday was only 338 contracts.

So why would someone spend $200,000 to buy 100,000 2-cent puts?

Are they expecting the stock to tank?

In a perfect world (for this trader), maybe …

But they are more likely looking for a swift move downward.

This inexpensive bet does NOT need a lot of movement down to become profitable.

Check out the profit/loss curve …

What this tells us is that without any other help, the trader needs BB to drop to below $8 by Monday for the trade to win.

But … what if during the drop implied volatility explodes again?

If BB drops to $8 and the implied volatility of the options goes up 50%, guess how much money this trader makes:

Almost 1.2 million dollars …

That would be six-times his or her money on risk.

If the stock keeps going, they can make even more money.

This is the type of longshot trade that either is …

  • A trader making a crazy, calculated bet based on risk (essentially having a budget to go play at the Vegas slot machines)

  • OR … it’s a trader who knows something others don’t

My gut says it is the latter …

Still, though.

There are probably better ways to play this than the Mar12 5 puts.

The 8 puts only cost 7 cents, for goodness sake.

That is a MUCH better play than the 5 puts…

But sometimes these guys have their minds made up where they think a stock is going — and they choose to maximize their leverage.

The 5 puts are certainly doing that.

This is definitely one to keep an eye on ..

And set up a trade in Robinhood Trader based on this flow (and some other paper that printed).

Your Only Option,

Mark Sebastian

Spike or Swell: Part 2

Hey Traders,

The last time the VIX actually experienced a swell was way back in August.

Notice below how the VIX started to rally in the middle of August — ALONG WITH the S&P 500:

Over the next few weeks, once the VIX popped, the S&P 500 sold off beyond its initial drop.

It bottomed out at the end of September.

What We See Now

Now let’s look at what happened in the last couple of weeks:

While the VIX rose modestly, it was in conjunction with a falling S&P 500 …

Then we had our VIX shock, which sort of came out of nowhere — VIX had actually been down over the previous two sessions.

So when I saw S&P’s 90-point rally on Monday, I asked myself if I believed it.

The answer was …

Yes, I do.

I think what we saw last week was a spike.

And once the VIX falls back quickly after a spike, it tends to lead to an uptrending market for several weeks.

So I expect the Option Pit VIX Light to go Red on Tuesday, with the VIX heading down.

I also expect some follow through on Monday’s market.

I would be using this opportunity to fade VIX (alongside all the size traders who have been long on-the-money puts for a few weeks.)

Money Move to Make

I would be a buyer of VXX 15 puts for 1.25. There is a huge sloping contango now (futures price is higher than the spot price) and the VIX appears to be heading to sub-20.

The VIX Option Pit VIX Light Is Yellow, and we expect big moves in VIX.

Your Only Option,

Mark Sebastian

VIX Is Primed for A Move

Hey Traders,

The Option Pit VIX Light turned Yellow on Friday morning.

This means we are looking for a strong move — either up or down — in the VIX.

And …

Monday morning, the VIX was down 4 points.

Will it keep going, or is this a big bear trap?

I can tell you this:

The market is positioned for a drop.

Take a look at open interest in puts and calls in the VIX options:

With the VIX blowing up and volume has increased … but the trading has actually been mostly to the downside.

Put open interest is 4.47 million contracts … call volume is only 4.08 million.

That’s right, coming in this morning — on the heels of a REALLY ugly close on Friday — there were more puts than calls.

And take a look at where the open interest lies:

The market is HEAVILY long at the money on downside puts.

Traders have been buying every put option from 26 to 17 they can.

This is not a market that thinks Thursday’s VIX spike is going to last …

And I predict VIX light will go Red tomorrow morning.

The Option Pit VIX Light Is Yellow, and Volatility Will Move ( … and we’re leaning toward down.)

Your Only Option,

Mark Sebastian

The Secret to Successful Trading

Hey Traders,

My older son has his first baseball tournament of the season today.

And he’s going to do well …

How do I know?

Because he understands the secret to successful trading.

At some point this weekend, he’s probably going to strike out (hopefully swinging, if it comes to that) …

BUT he’s not going to take that strikeout with him back to the field once he leaves the dugout.

By the time he’s fielding a ground ball, he will have completely forgotten about his last at-bat.

You see, he has it in him to forget his failures and move on …

And he also learns from setbacks …

If he faces the same pitcher the next time up, he probably will get a hit.

There’s another kid on his team, who’s maybe even more talented, but he won’t get the same result after a strikeout (if history is any indication).

He’ll get into his own head, maybe make an error in the field …

… and potentially start crying.

He’ll be done for the game.

No Crying in Trading

You see, it’s not just skill and talent.

It’s having the mental capacity to move on that allows one kid to have a great game and another to have a seat on the bench.

This is also the secret to successful trading.

When I was in Group One’s training program learning to become a market maker, I made a “healthy” number of mistakes.

But I rarely made the same mistake twice — and I never let the trainers’ grilling get to me.

Mental fortitude allowed me to get through the training program, along with just five others out of a class of 20, while nearly all of the kids that went to Ivy League colleges got chopped.

I’m not kidding …

There were 16 Ivy Leaguers and four non-Ivy Leaguers in my training class …

Total graduates: 3 Ivies, 3 Non-Ivies

Those of us who went to Villanova (me) or Fordham had it in us to move past our mistakes.

Many of the Ivy Leaguers had never actually experienced failure.

In a high-stakes training program, when you screw up … you hear it.

Luckily, I was pretty used to hearing it (thanks Mom and Dad! )…

Failing and being unable to get past it ultimately led to 14 brilliant 22-year-olds getting the boot.

What It Means for You

You need to know that in trading …


I lose on trades often.

I have losing days.

I have losing weeks and losing months.

Does it bother me?

Heck yeah!

But does it affect me?

Only in positive ways.

Take our Robinhood Trader program, for instance. I went through a good three weeks of drawdown a couple of months back.

I grew my account from $5,000 to $8,700 dollars in about five weeks.

Pretty good!

I then traded my way out of $2,000 dollars over the next three weeks.


Yet every day I sat down with the same game plan:

Use the Robinhood radar, find the best trade — and trade it.

As I was in drawdown, I huddled with my team of pro traders and asked, “Am I doing something wrong?”

The answer was NO — when it came to the trades.

But the answer was YES when it came to risk management. I needed to tweak how much I was willing to lose on a trade …

And I did.

That is why, since the beginning of January, I have had just one losing week —  and it was only marginal.

Losses, while annoying, do not affect my killer instinct or my belief in what I’m doing.

When the trading day is over, I move on and go back at it the next day.

That’s why I’m able to put together huge win streaks — because I’m able to forget about losses.

But for many retail traders, a couple of losses gets them scared.

And just like the kid on my son’s baseball team, when you get scared, you make more errors …

You ride losers and cut winners short.

Coming OUT of losing, I had some of the biggest percentage winners of my career.

I never lost my ability to ride winners, and by tweaking to cut losers, my account has gone up and up.

So if you want to be a winner … know you will have losers and learn from them — but don’t let them change you.

On Your Side

The vast majority of retailer traders could benefit from professional assistance …

And that’s not a knock!

It’s simply that the education and insights offered by a team of pros is a great way to help everyday traders make more money.

Our Option Pit Pro students certainly agree. 

We teach concepts, we teach trading, we technical analysis …

And most importantly, we coach you on the mental side.

I always have my team around me … and an entire Elite Pro Chat Room that I can consult with when I’m in a funk.

And they won’t see me crying on the bench …

Because I’m always in the game.

Who’s your team?

Your Only Option

Mark Sebastian

Mark Sebastian

Spike or Swell

Hey Traders,

On Thursday, the VIX went from 21.34 to over 30 before settling at 28.89.

That is a huge move in the VIX by any standard.

But will it be meaningful a month from now?

That depends on if the VIX move was the beginning of a “swell” or just a “spike.”

Spikes in the VIX happen often …

We’ve had several in the last few months.

With the VIX over 20 for the last year nearly to the day, spikes are expected

Here are all the spikes from the last six months:

Of these, you could argue that we maybe had two mini swells, in September and November.

Mostly, though, these were obvious spikes.

Spiking or Swelling?

A spike in the VIX tends to happen suddenly and out of nowhere.

Then, almost as quickly, it disappears. The most obvious example was the Capitol Hill riots in January.

A swell on the other hand is more like a wave …

It starts slowly in the middle of the ocean, and then grows and grows and grows …

The next thing you know, a tsunami is hitting the shore.

A typical swell starts with a move higher in the VIX, followed the next day by a slightly bigger move…

The next day there is typically a pronounced move higher, one where novice traders might step in and try to short …

There may even be a down day on the VIX the next day …

But the down day will NOT touch the high of the previous day.

Then … the VIX begins to go up again and again until finally … BOOM — VIX spike!

But when the spike happens, VIX is already up 5-10 points from before where the swell began.

This classic example of a swell took place a year ago:

Notice the seemingly relentless rise in the VIX over a one- week period … followed by some SLOPPY chop …

Which NEVER touches the low of that 1st big candle …

And then another relentless rise.

Swells lead to the VIX going up essentially for a month straight, similar to the stock market climbing a “wall of worry.”

How About Now?

True swells happen about once every 2-3 years.

The previous swell to the one above was in January and February of 2018.

Prior to that … August 2015, August 2011, May 2010 and Summer 2008.

For what happened Thursday to truly matter,  I need to see more than one day of fear.

I need to see the VIX up on Friday.

If it IS up today, I’ll switch the Option Pit VIX Light to Yellow, meaning heavy movement is likely — in either direction.

Because Monday could end up being ugly.

Bad Thursday/Worse Friday/Crash Monday is a classic pattern that dates all the way back to 1987.

Now, I’m not so certain Thursday was anything more than a spike.

We DID have volatile trading on Wednesday, but that ended with a vol crush.

Thursday’s move wasn’t out of nowhere, but it certainly was  not “swelled” into.

Basically, Thursday has to be a spike — OR the very beginning of a swell (likely to be a mini swell, if it is).

Today’s action is key.

Thinking Strategically

I did pair some of my long volatility hedges at the end of the day on Thursday, because I’m not fully certain the action is much more than a one off event.

If I am wrong — and I’ll know by the end of the day Friday — I can make adjustments.

For now, I like the trade I posted yesterday even more …

I’m a buyer of the April 23-20-16 put fly for about .05.

There are several other trades that are more designed for professionals that I threw in our Pro Chat room.

One being the May-June 35 put spread in VIX (buying May).

This is essentially a way of ‘curve trading’ (trading one month against another) using options instead of futures.

At the end of the day the middle of the curve did get really flat


The May-June 35 Put Spread allows me to, in a risk adjusted manner, get short May and long June futures.

The Option Pit VIX Light Is Red (for now), and volatility is likely to drop.

Your Only Option,

Mark Sebastian

I Call Top (And Bottom)

The Option Pit VIX Light Is Red, and I like short volatility plays.


Hey Traders,


There are two major volatility indexes for the NASDAQ 100 …

    • VXN: Essentially the VIX calculation, but run over NDX options. This index uses all options that have a value (a bid) and calculates the overall implied volatility of the NDX with a constant duration of 30 days.
    • VOLQ: The newer of the two volatility indexes is based on QQQ options (the smaller version of NDX). Does not look at all options with 30 days to expire. Its calculation comes from the options that are at-the-money (where QQQ is trading) and the strikes directly around the ATM option strike.


While the two indexes both provide valuable information on whether traders are buying or selling options …


It is in running the two against each other that I have found REALLY valuable market insight.


Tops & Bottoms
If I take the VXN and subtract VOLQ from it on a chart, I get an output that looks like this:


What are we seeing?


At the lows, the spread almost got to flat. This means that at-the-money options were so high, there was virtually no difference in volatility across strikes …


Skew is the volatility relationship between out-of-the-money options and ATM options. 


When OTM options are expensive in terms of implied volatility, skew is “steep.” By the same token, when they are inexpensive, skew is flat.


In this case skew was flat — OTM puts and OTM calls had almost the same implied volatility as ATM options.


Notice this took place at the March lows.


Another low took place in mid-September. What was happening then?


The NDX was at the tail end of a 1500 point sell off.


Now take a look at the highs.


Generally speaking, the spread tops out at around 5.5. 


The high from the Feb 12 almost EXACTLY corresponds with where the current 8% selloff (at the lows yesterday) started.


Take a look at the NDX over the VXN-VOLQ since Aug. 15 of last year …



Interesting …

All of the peaks and valleys of VXN-VOLQ correspond to turning points for NDX.


Using these two indexes to track NDX skew really is eye opening …


How About Now?

So what are they saying now?


As you can see  above, the spread has flattened up considerably.


This tells me that we could be ending the NDX/QQQ unwind from last week.


While the spread of 3.93 COULD tighten further, if it gets to under 3, and certainly if it goes to 2.5, that signifies an opportunity to go long the QQQ …


Unless we are in the midst of a giant sell off — in which case I would wait to buy for SIZE until we get a number under 1.


At sub-3 on this spread I would begin buying and I would go BIG long QQQ if it gets to below 1.


The Option Pit VIX Light Is Red, and I like short volatility plays.


Your Only Option,

Mark Sebastian


Amped for Energy

Hey Traders

The energy ETF XLE has been strong for over a month now, but especially so for the past 10 days.

The recent ramp-up has been helped by a big rotation out of tech that saw the QQQ drop 8% (at the low on Tuesday).

XLK, the tech ETF, closed down over 4% since Feb. 12, while XLE is up almost 9% in that time.

I have fundamental reasons to think the energy surge will continue:

  • The Biden administration is gearing up for regulatory action that is going to cause oil rise

  • More importantly, demand is clearly picking up. People are traveling more as the US gets vaccinated. For instance, I’m going to see my parents for the first time in six months sometime in April (now that they both have MRNA vaccine).

Even with XLE up 9% in 10 days and $19 since the beginning of November (over 65%), the option order flow is saying …


Two massive bullish trades in XLE point toward a lot of upside …

So let’s break these down.

Trade No. 1

On its surface the first trade looks like a call spread sale …

That would normally be bearish (meaning the trader wants the stock to drop).

But in this case it was actually a roll …

The customer was already long 46 calls for a healthy profit. He or she sold their long 46 calls and rolled them to the 50 calls.

In doing this, the trader collected 1.86 AND maintained upside exposure to XLE.

This is classic risk management on a winner that has the potential for continued bullish movement.

I did the EXACT same thing in MRO yesterday …

I was long the MRO March 9 call for .88, and I sold my position at 1.55, 1.85 and 2.11.

Translation: Increases of 40%,  40%, and 20%. … All told, a 101% gain.

I took a TINY bit of this profit and bought the March 5th 11 calls for .60.

The trader above was more aggressive than I was, because they used a healthy portion of their profits to buy the 50 calls.

This trader would NOT have done this trade if they didn’t think the stock was going to keep going.

Trade No. 2

The second trade is more cut and dry.

A trader bought the September 52-59 call spread on a small ratio, paying a little over 1.70 net.

The trader who put this on wouldn’t have done so unless they think the stock is going to make a run at $55 a share — because that’s where the spread really starts to see its profit ramp up.

You simply do not do this trade unless you have a strong bull case for the next six months or so.

This trader is looking for another 17% in XLE between now and September expiration.

The Takeaway

The two trades above, along with my fundamental case, have me LOVING energy.

I like conglomerates like XOM and CVX, and I like names like MRO and HES as well.

They will all do better with increasing demand for gas.

One name in particular that keeps showing up on my proprietary trading scanner is ET.

I will likely be buying calls this week …

Your Only Option,

Mark Sebastian

Traders Still Fading VIX

The Option Pit VIX Light Is RED, and short volatility is likely to work in the coming weeks

Hey Traders,

I wrote last week about a trader bought more than 100,000 March 18 puts for .10

Today, we’re seeing similar action in March.

This time, traders are coming for the 19 puts paying .12 …

And they have gone up in pretty large blocks of  6,000, 6,200 and 8,000.

On the day, more than 18,000 March 19 puts have traded. Check it out …

Retail paper doesn’t normally buy options in blocks of 3,000, or even 1,000 …

This is 100% institutional paper buying based on the bid-ask spread …

If this was retail, we would have seen a lot of small trades for .12. Instead we saw the large blocks above, which means “big money” was buying puts.

So while these might appear to be YOLO (you only live once) plays, the size of the blocks indicates they’re large institutional trades.

The Takeaway

What does this mean given the selloff on Monday and Tuesday?

Well,  if you look at the way VIX is behaving — it’s kind of anemic given the 100-point drop in SPX — I think the message is clear …

This selloff may have a day or two left in it, but when it ends…

I think the VIX-above-20 trade ends with it.

If we can get back to the highs near 3920, I think the VIX is heading to 18.

So, I’m still a buyer of puts in VIX and have I those positions on in our Volatility Edge product, which is designed to execute timely trades that take advantage of the VIX’s momentum-style movement.

Speaking of which …

The Option Pit VIX Light Is Red, and we expect the VIX to fall.

Your Only Option,

Mark Sebastian