What Flips The VIX Light Switch?

Hey Traders,

For a low volume trading day …

We certainly saw a lot of action to finish out the holiday-shortened week.

In particular, I took note of the VIX, which was quick to spike up to 28 (that’s Zone 4 for those of you that know your Vol Zones).

What is interesting is that before Friday’s trading session, my Option Pit VIX Traffic Light – a proprietary indicator built by yours truly – was shining yellow …

Telling me the VIX was getting ready to make a big move.

How did it know?

Let’s take a look at how the Option Pit VIX Traffic Light works.

Red Light, Green Light

As you would expect, the Option Pit VIX Traffic Light has three “colors” that tell us what to look for out of volatility in the near future:

      • Red: Volatility is falling, or staying stable. You can trade and use your normal approach to risk management. 
      • Yellow: Volatility is going to make a move, but it could go either way. Think of this as a “caution” sign. Tap the brakes, and make sure you’re trading like “anything could happen.”
      • Green: It’s time to get ready for some excitement … and opportunity! Volatility is on the move. If you’re a confident volatility trader, it’s a great time to make your move, as long as you practice strict risk management, and are intentional with your trading.

Now, on Wednesday, the Option Pit VIX Traffic Light was yellow, which means volatility was setting up to make a move.

But I do want to emphasize that the “move” anticipated by a yellow light can be either up OR down.

So a yellow light does not necessarily signal an impending switch to green … it could mean that volatility is getting ready to tank.

However, as it turns out, Wednesday’s light just so happened to precede Friday’s big VIX pop.

These Traffic Light readings aren’t just arbitrary …

They aren’t just my “best guess” at where the VIX is going.

The Option Pit VIX Traffic Light is actually based on several indicators that alert me to any unusual changes in the vol landscape that could signal a change in trend …

      • VIX Futures Curve
      • VIX and S&P 500 (Ticker: SPX) Correlation
      • VIX of VIX (VVIX)
      • VIX Realized Volatility

First, and perhaps the most important indicator, is the VIX futures curve.

The VIX futures curve plots out where VIX futures are trading relative to VIX spot/cash price.

About 80% of the time, the VIX futures curve is in contango – meaning VIX futures are trading progressively higher than cash VIX.

VIX futures must equal VIX cash by expiration, so when the futures curve is in contango, we expect to see VIX futures falling into expiration.

A VIX futures curve in contango usually tells me things are “normal,” and therefore we can expect to see the VIX behave within its usual parameters … and usually head lower.

Now, when the VIX spikes above futures, the VIX curve enters a backwardation pattern.

Backwardation refers to the VIX futures trading progressively lower beneath spot VIX.

Here is the VIX curve on Friday It is more of a flat curve rather than a “picture perfect” backwardation pattern (as the curve is not totally inverted), but it is still trading under VIX cash:

This tells me that fear has quickly entered the marketplace, and I know that traders are nervous RIGHT NOW.

Backwardation is a “green light” indicator, while a flat curve (still trading above the VIX) would be a “yellow light” indicator.

You can find out more about the VIX curve in this video right here.

Correlation … Might Equal Causation

The second VIX Light indicator is S&P 500 (Ticker: SPX) and VIX correlation.

In other words, I am looking to see if volatility and the SPX are headed in the same direction.

Usually, SPX and VIX have an inverse correlation, so if SPX is going higher, VIX is falling, and vice versa.

If I see the S&P 500 going higher, and the VIX going higher, this signals me that it might be time to change the light.

You can see how the SPX and VIX are typically inversely-correlated on this 30-day chart. The S&P 500 is on the top, and the VIX is on the bottom.

Notice how before Friday, the VIX was heading higher as the S&P 500 remained mostly flat, or gained a little.

This was one of the reasons I turned my light yellow earlier in the week.

VIX of VIX, Vol of VIX

The third indicator is the VIX of the VIX, or VVIX.

VVIX tells me the appetite for volatility options, and how expensive it is to buy or sell VIX options right now.

If the VVIX is low, or falling, that is a red light indicator.

If traders are loading up on vol options and spiking VVIX, this can signal that there is anxiety in the market.

Typically, assuming a sub-20 VIX (which is most of the time, even if it doesn’t feel like it lately!) I look for the VVIX to remain below 100.

A move above 100 warrants a closer look.

However, since the COVID pandemic, with the VIX elevated, VVIX has tended to also remain high.

But this is not telling me traders are looking for volatility to spike …

Rather, often they are snapping up VIX puts, looking for a vol drop.

But look at VVIX on Friday; it shot up more than 35%!

Finally, the fourth indicator is realized volatility in the VIX – vol of VIX.

I look at the 10-day and 20-day realized (historical) volatility in VIX to see how they are moving.

If I see realized vol heading higher, this is something to keep an eye on.

Here is a look at 10-day (dark blue) and 20-day (light blue) realized volatility for VIX over the last 30 days:

VIX realized vol was more or less flat on Friday … as it has been for the last few days.

Typically, the VIX futures curve has the strongest effect on the VIX Traffic Light. If all other indicators are red, but the VIX curve goes flat and hits “yellow” territory, the light will usually change.

VVIX and VIX volatility are more sub-indicators that I use to help me interpret changes in the VIX curve and SPX/VIX correlation.

However, that is not to say that movement in VVIX or VIX volatility will never cause me to change the traffic light; they can and do.

If you want to get the latest VIX Traffic Light updates, there are two things you can do:

      1. Sign up for my VIX Edge newsletter, where I’ll email you regular updates on what’s happening with volatility.
      2. Join my Volatility Edge program, where you’ll get exclusive access to VIX Traffic Light updates in your Member Portal, PLUS trade recommendations to help you profit by trading vol! Right now is the CHEAPEST you will ever be able to get in – so make your move!

Your Only Option,

Mark Sebastian


You Can’t Trade The VIX


The Option Pit VIX Traffic Light Is Green: Volatility Will Likely Go Up.

Hey Traders,

Today is a shortened trading session …

But we are still seeing plenty of excitement …

COVID fears have spiked the VIX, and the markets are taking it on the chin.

This is not what we are used to seeing during the typical low-volume Black Friday trading session.

Usually on Black Friday, everyone is too busy chasing down the best deals of the year for Black Friday …

Speaking of, as a VIX Edge subscriber, you REALLY need to check out what we’re offering this year … it is the BEST way to take your volatility trading to the next level.

Get the full details here.

And today, in lieu of looking at the quiet VIX pits …

Let’s take a look at why you can’t actually trade the VIX.

The VIX Is Untradeable 

There is one crucial thing that many newbie traders either do not know, or fail to remember …

You can not trade the VIX itself.


Well, simply put, the VIX does not exist.

The VIX is simply an indicator; it measures forward-looking volatility expectations for S&P 500 (Ticker: SPX) options.

There is nothing to “buy” or “sell.”

It is like other indexes … except the VIX cannot be mirrored by ETFs holding ‘baskets’ of what the VIX is tracking …

So any time we are talking about “trading VIX” we are never talking about the index itself.

Instead …

We are looking at VIX futures, and products based on VIX futures.

VIX futures allow us to trade where we think volatility will be at a certain date in the future.

It is crucial to keep this in mind, because VIX futures do not precisely trade in line with VIX.

They trade at either a premium or a discount to VIX spot price.

As a reader of VIX Edge, you probably know that typically, futures trade at a premium to VIX spot, which is when the VIX futures curve is in contango. 

When futures are trading at a discount to VIX, the VIX curve is in backwardation – so we would see the green VIX line above the futures curve.

Another important thing to remember about VIX futures is they are European-style futures – meaning they cannot be exercised early, and must be held until expiration (which occurs on a Wednesday morning, so futures stop trading at the close on Tuesday).

So you can’t buy a VIX future way in advance, wait for a VIX spike, and then sell to profit. You have to hold onto through expiration.

And the most important thing to know about VIX futures? 

By the time VIX futures reach expiration, they must equal the current VIX.

So if the VIX futures curve is in contango, we will see them decay into expiration, until the equal VIX spot.

In backwardation, VIX futures will actually rise into expiration to meet VIX spot.

VIX exchange traded products (ETPs) likewise do not trade in line with the VIX itself. Instead, they track VIX futures.

For example, iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX) tracks VIX futures 30 days out from expiration on a rolling basis (so as the front-month gets closer to expiration, the ETN will rebalance by selling the front month and buying the second month, keeping the average holding at 30 days to expiration).

There is also ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY), which tracks also tracks VIX futures 30 days out, but on a 1.5x leveraged basis (basically, for every 1 point VXX moves, UVXY moves 1.5).

We might also be getting ready to see new inverse vol ETPs … you can read about that right here.

And of course, there’s options.

Again, when you are trading VIX options, you are NOT trading options directly tied to the VIX index itself.

Instead, VIX options are tied to VIX futures.

So the at-the-money strike for, say, December VIX options, isn’t actually where the VIX is currently trading, but where that VIX future is trading.

You can also trade options on VIX ETPs like VXX and UVXY … but again, these products are tracking VIX futures.

Actually, we trade VXX and UVXY quite a lot in my Volatility Edge program (which we just so happen to be running a Black Friday special on … ahem!).

If played right, VIX ETP options can be HUGELY profitable …

Because …

VIX ETPs track VIX futures …

And because VIX futures are typically (about 80% of the time) in contango (trading above VIX)…

We know VIX futures are usually falling to meet spot VIX …

So ETPs that track VIX futures are ALSO falling …

Look at this one-year chart of UVXY:

That is why I NEVER advise you to buy and hold VIX ETPs like this.

(I explain more here.)

But they can make for some REALLY good options trades in the right conditions …

So remember, when we are trading “VIX” … we are never actually trading VIX proper.

We are trading VIX futures … or products based on VIX futures.

This allows us to speculate on where VIX is headed …

But not actually hold “VIX” itself.

In my Volatility Edge program, we are about to launch an 8-week educational course on VIX Made Easy and VXX Made Easy.

It will help you become a MASTER at trading volatility.

But … it is a members-only live event series.

So you need to join if you want to attend.

Have a great rest of your Friday … and enjoy your weekend.

Your Only Option,

Mark Sebastian

Will The VIX Pop On Black Friday?

The Option Pit VIX Traffic Light is Yellow: Volatility Is Likely to Swing Wildly …

Hey Traders,

The VIX traffic light officially switched to yellow on Wednesday morning.

The market opened down 25, and then rallied to close up 10.

While a 35 point swing is not what it used to be, the down-to-up action is classic yellow light movement.

A yellow light means the VIX could make some really wild moves, both up and/or down.

But what has happened in the past?

The truth is that when the light goes yellow, it is far more likely to switch back to red than it is to go to green.

This year, we have had a brief green light, but for the most part, every yellow light has switched to red.

Making the case stronger that we are more likely to see a red next is the VIX futures curve.

The things that switched my light from red to yellow were the less important indicators …

My most important indicator – VIX futures curvature – never left contango:

At the peak of the VIX action on Wednesday, when VIX was over 20, the curve did start to get legitimately flat …

But it did not hold.

VIX really did have a pretty big range, going from over 20 to under 19:

I think there is a strong chance that in Friday’s shortened session, we see the market have a strong rally.

We could see the VIX threaten to head back under 17.50, or even 17 …

From there, I’ll be interested to see if traders try to front-run volatility in the first couple of weeks of December …

I know I have been talking about VIX puts for a bit.

The trade I laid out yesterday, with the hedge, is still the best trade …

I also might look at a long DJIA, holding through the trading session.

Your Only Option,

Mark Sebastian

The Only Way To Play This VIX

The Option Pit VIX Traffic Light Is Yellow: Volatility Is Going To Move


Hey Traders,

The VIX Traffic Light stayed persistently red … but has finally switched to yellow.

Tuesday was a classic example of why I like to wait to change the light …

The VIX closed about flat, after spiking in the morning …

VIX futures got crushed …

But even after closing flat-ish, the VIX is still over 19.

This is way out of whack with how much the S&P 500 (Ticker: SPX) is actually moving …

Check out realized volatility on the SPX:

The dark blue 60-day historical volatility (HV) is 11 …

Every other measure of realized volatility (10-day, 20-day, and 30-day) is under 8!

Yet VIX is 19?!

This cannot stand …

VIX needs to drop like a stone …

Or the SPX needs to explode …

So what’s it going to be?

Well, remember the FOMC is still pumping $100 billion a month into the market …

Earnings are over …

We are heading into Christmas, when the SPX typically rallies …

On Tuesday, every time algos tried to crush the market, it got bought, until it ended the day up.

I think we are due for a FACE RIPPING rally in the next couple of days.

It could be around Black Friday or could even happen today …

That said, we could still fall apart.

So what to do?

On Tuesday in Volatility Edge we bought VIX puts with a hedge …

I’ll tell you the hedge side of the trade:

We bought the VIX 24-32.5-strike call spread for $1.00. 

Against that, we bought puts.

This is literally the only way to play VIX right now because it could make a wild move.

Your Only Option,

Mark Sebastian


Is Big Money Watching For Meme Squeeze Part 3?

Hey Traders,

Today I want to take a look at a Big Money trade targeting a former (and possibly future!) meme name.

A lot of times when I see Big Money making a decisive move on a stock …

I’ll look into a potential piggyback myself.

Big Money traders often have access to information that we don’t have, so they’re able to make their moves early.

Seeing and interpreting Big Money moves can help you spot trade candidates early, so you can move in and out with Big Money cues …

And hopefully some Big Money level profits!

But … in this case …

This is a trade I will NOT be taking.

Big Money Energy

Camber Energy (Ticker: CEI) has come under fire from meme traders several times, squeezing higher in February …

Chart courtesy StockCharts

And exploding higher in late September before plummeting back down to earth.

With CEI closing on Tuesday at $1.34, the shares are still well off their August low of $0.33 …

But also still quite a ways away from their meme peak at $4.85!

What happened to the meme stock squeeze?

The shares started moving higher in late August after news broke that a CEI subsidiary had struck a deal to provide their patented carbon capture technology to ESG Clean Energy …

But really, if you look at the volume bars on the chart …

A surge of social media and Reddit attention is more likely what caused the shares to balloon nearly 1,000% in less than one month.

However, profit taking and a critical short report from hedge fund Kerrisdale Capital caused the shares to quickly retreat from their meme highs. The report out of Kerrisdale alleged, among other things, that CEI would soon be delisted, and that their fully diluted share count would be more than triple what the company currently reports.

However, the shares are still maintaining above their pre-squeeze lows.

If we zoom in to take a closer look at the more recent price action …

You’ll notice a few recent volume peaks that have helped the shares gap higher …

And they’re more or less holding onto those gains so far.

Interestingly, recent reports show that short sellers have recently been piling onto the shares, with 13% of Camber’s float now sold short.

Maybe that’s why traders who have been targeting the energy stock for a short squeeze don’t seem to be deterred by CEI’s slow creep lower …

On Monday, CEI announced it had been granted its request to deliver a delayed earnings report, and the shares spiked 19%.

Meanwhile, one Smart Money trader made a bullish bet …

With CEI trading higher on the day, this trader bought 3,514 contracts of the November 26 2-strike calls.

That’s a fairly hearty $35,140 bet that CEI gains a minimum of 56% by the end of the holiday-shortened week!

What are the rest of the pits saying?

Well, for one, they’re much busier than usual, with CEI’s pits seeing a whopping 294% of their usual daily volume on Tuesday … although that was still only a grand total of 44,691 contracts traded over the course of the trading session.

Calls outnumbered puts nearly five-to-one … but that doesn’t mean all of this call action was opening.

In fact, it looks like some traders are cutting and running out ahead of this Friday’s weekly expiration.

Prior to Tuesday’s trading session, CEI’s most popular options contract was the November 26 1.5-strike calls, with more than 25,000 contracts of open interest.

However, this contract saw more than 10,000 contracts cross the tape …

And with CEI below the $1.50 mark, and just 1.5 trading days until expiration, I think many of these traders were likely limiting their losses.

So Big Money’s bullish bet on Monday …

Seems to contradict the retail masses on Tuesday!

Who knows … maybe that Big Money trader knew something we don’t …

But I’ll be staying on the sidelines for this one.

Your Only Option,

Mark Sebastian

Is Volatility Ready To Drop Or Not?!

The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To Drop 

Hey Traders,

The Option Pit VIX Light is red …


The market has been flat for a few days …

But VIX is now over 19!

What is going on?

The answer is that this emperor (the market) has very few clothes …

He is still wearing underwear and maybe socks, but no gown …

What do I mean by that?

What is actually going on?

Market breadth.

It measures how many stocks are going up and how many stocks are going down.

Positive market breadth is when there are more gainers than losers.

Negative is when there are more losers than gainers.

This is a chart of the NYSE breadth index:

Since the 16th, NYSE market breadth has been AWFUL.

The mega caps were up, but the rest of the market?


Monday’s breadth was actually better than Friday, but the mega caps took it on the chin.

So, the question is, what to do?

I think the Nasdaq 100 (Ticker: NDX) is heading for some pain.

But VIX might come off as well.

19.40 is WAY over-baked. Take a look at market realized vol (10-day is white, 20-day is light blue, 30-day is lavender, darker blue is 60-day):

Even 60-day historical vol is near 10.

The market is not moving, but money is flowing from sector to sector.

On Monday, we saw some serious order flow in VIX December options:

Traders are buying up the 15-strike puts …

As I said before, I think the 17-strike puts are a much better value. For that matter, so are the 16-strike puts, but I would still note the buying on the 15 strike.

Your Only Option,

Mark Sebastian

Your 401(k) Could Be Costing You More Than You Think

Hey Traders,

Saving for retirement is important.

And using tax-advantaged accounts is one of the BEST ways to help you save for retirement.

Traditional and Roth IRA accounts are great options that nearly anyone can open (there are some restrictions, especially for Roth accounts, which have an income cap) …

But perhaps the most well-known is the almighty 401(k) …

401(k) accounts offer tons of benefits … especially if your employer offers to match a percentage of your contributions!

However, 401(k) accounts can have a hidden dark side …

Are you paying too much to save?

Fees, Fees, Fees

Fees can be killer in a 401(k) … especially if you opt for a high expense ratio fund.

Just like compound returns can be magical over the long-term …

Fees can do just the opposite.

In fact, while 401(k) fees might not sound like much at first … 

When you do the math, they can cost you thousands of dollars over the years!

There’s generally three types of fees you’ll find your account subjected to: individual service fees, plan administration fees, and investment fees.

Individual service fees are fees that are charged for individual services on your account. For example, you may be charged a fee for taking a distribution from your account, or for taking out a loan from your account.

While pesky, since these typically are one-off transactions, they aren’t quite as detrimental to your overall account balance as ones that accrue over time. 

There’s also administrative fees, or fees that your 401(k) provider charges in return for basic operating expenses such as record keeping, accounting, and so on.

If you’re lucky, your employer might pay these fees for you.

However, it is more likely you’re footing the bill in terms of either a flat-rate fee, or paying a percentage of your total balance.

This is something you will want to keep an eye on, especially if your administration fee is balance-based.

In general, you can expect to pay about 0.5% to 1% of your account balance in administrative fees each year (though of course some are lower, and some are much higher).

Obviously, the lower you can keep these administrative fees, the better, but you are often limited to what is offered through your employer.

What you CAN control, however, are the investment fees.

When you enroll in your 401(k), you’ll be asked to allocate your contributions to specific investments, such as mutual funds, stocks, bonds, target-date funds, and so on.

This is where you want to really go through with a fine-tooth comb.

For example, in Plan XYZ, the expense fees may range from 1.20% to 0.04%.

Typically, something that requires more active management on behalf of the plan administrator, such as a target date fund, will have higher fees.

Index funds, such as Vanguard Mid Cap Index Admiral, often have significantly lower fees.

Now, the difference between a 1.2% and 0.04% might not sound like a lot on the surface … after all, a 1.2% fee is still only just over a penny out of every dollar. 

Small potatoes, right?

Not so fast.

Take a look at the difference in total fees paid over a 30-year period between a 0.04% and 1.2% expense ratio, assuming you deposit only $5,000 per year. (By the way, you can find the calculator right here.) 

The 0.04% expense ratio plan will cost you an average of $3,418, while the high expense investment will cost you almost $91,000 over the course of your savings timeline.

Now, 1.2% is a rather extreme example …

So let’s look at something a little more middling, like 0.6%.

That still works out to a difference of nearly $45,000 more for the high-fee investment!

And if you contribute the maximum amount (currently $19,500 per year, moving up to $20,500 per year in 2022)?

That’s a difference of $151,002!

Now, you might say, “but Mark, my timeline isn’t 30 years! I’m much closer to retiring than that. Is there that much harm in choosing a high-expense fund for a shorter duration?”

The $7,567 difference may not seem as extreme as $151,000 in the example above …

But you’re still paying $8,116 for the high-fee, rather than the $549 for the low-fee fund.

The argument, of course, is that these higher-fee funds will automatically rebalance for you. And that’s true. If you’re a very hands-off investor … well, maybe you don’t mind paying a super premium to have someone else manage your book for you …

But, given that you’re here, reading this, I don’t think you fit the bill.

The other argument, of course, is that the high-fee funds will see better returns over the long-run.

This assumption is dubious, at best.

In fact, evidence that active funds outperform index funds is hard to come by, and often limited to just one or two specific sectors, like bonds or real estate.

So before you sign up for the super-high-expense fund, thinking that surely, it must charge so much because it outperforms …

Think again.

Looking at a real-world example, a 2025 target date fund offered by a 401(k) provider who shall not be named, charges a 0.61% expense ratio.

It’s 10-year average return is 8.92% …

Meanwhile, a Vanguard Large Cap fund offered with the aforementioned 0.04% expense ratio has a 13.71% annual return.

Yes, we’re skewed by the historic bull market we find ourselves in …

But the chances of that trend reversing to the point where it’s worth it to pay an extra $151,000 over the course of my career to be in the actively managed fund is slim to none.

So I encourage you to pay extra close attention the next time you receive your 401(k) statement.

Don’t overpay for services that aren’t actually doing you a service.

Your Only Option,

Mark Sebastian

My Holiday VIX Trade

The Option Pit VIX Traffic Light Is Red: Volatility Is Likely To Drop.

Hey Traders,

The VIX started off the week by trading lower …

Not much lower, but lower nonetheless …

This is significant because Monday is the day we are most likely to see the VIX higher.


Because of the Weekend Effect.

The Weekend Effect essentially refers to the fact that market makers decay out weekend theta during the week.

Because markets are only open five days each week, market makers need to decay out the extra weekend’s worth of time premium during the days the market is open. 

So instead of decaying out only five days worth of time premium each week, market makers decay out 6.5 days worth of time premium during the trading week, to take into account the days that the market is closed.

However, the VIX, which measures the implied volatility (IV) of S&P 500 (Ticker: SPX) options, does not take into account this accelerated theta decay.

The VIX actually reads this extra decay as a decrease in implied volatility.

Therefore, the VIX is historically down four days each week.

But on Mondays, when the accelerated decay process has not yet started for S&P 500 options, the VIX is usually higher.

So seeing the VIX even slightly lower (or only slightly higher) on Monday morning is fairly unusual, and significant.

But that is what we saw to start the trading session today.

And even with the VIX now up about 0.5 points … that is essentially flat, or slightly down, taking into account the Weekend Effect …

Now I want to take a look at VIX futures, because unlike VIX, VIX futures trade almost constantly, and therefore they are not subject to the same Weekend Effect.

Right now, VIX futures are trading at quite a premium to VIX index, so we have the VIX curve in a pretty steep contango (which is a big factor of the Option Pit VIX Traffic Light being red) …

And if we look at iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX), it is actually a touch lower on the day.

What’s more, the VIX pits are seeing some significant buying volume today …

There seems to be several big traders piling into the December 15-strike puts.

And these puts are CHEAP.

We’re talking $0.10.

With this week’s shortened trading week, we will be seeing an even more prominent Weekend Effect as theta decay is accelerated more than usual.

Assuming the market does not tank (and historically, it does not tank during Thanksgiving week) … I think the VIX could be headed for quite a drop.

However …

I think there is a better way to play a falling VIX than the 15-strike puts.


Personally, I like the VIX December 17-strike puts for $0.50.

Your Only Option,

Mark Sebastian

3 Names On My “Nice” List

Hey Traders,

It may be hard to believe it …

But the holiday season is (almost) upon us!

And what better way to celebrate than by looking at some holiday trades?!

Today I want to dig into three names I’m watching …

And we’ll see if the pits are putting them on the “naughty” or “nice” list!

Here’s the three holiday names I like.

Target Corp. (Ticker: TGT)

TGT delivered its earnings report on Wednesday, and from looking at the chart, you would assume they delivered some pretty bad news …

Chart courtesy StockCharts

But actually, the retailer delivered overwhelmingly positive news, including surpassing Wall Street’s earnings and revenue expectation, and TGT assured investors that they have ample merchandise to get them through the holiday season, thanks in part to their ability to bypass supply chain bottlenecks by chartering their own cargo ships.

But the shares dropped 4.7% to $253.80 in the trading session following, and have continued to slide lower since then!

Frankly, I think TGT’s sell-off is an overreaction, and presents some good opportunities.

And I’m not the only one who thinks so …

TGT saw 150% of its normal trading volume on Friday, with calls outnumbering puts 2-to-1. 

Open interest is at 125% of its typical levels, and calls make up seven of the top 10 open interest positions. Specifically, traders have piled into the December 260-strike call, with 10,518 open contracts.

The December 230-strike put does have 9,328 contracts outstanding, but it is followed closely by the January 2022 220-strike, 210-strike, 260-strike, 250-strike, 270-strike, and 280-strike calls.

Options aren’t the absolute cheapest they’ve ever been, but implied volatility is only in the 30th percentile of its annual range, so you can get into a TGT trade without paying an arm and a leg.

In particular, it looks like the December 31 term is pricing in especially low vol expectations …

Just throwing that out there!

Mattel (Ticker: MAT)

MAT just debuted a new Barbie electric vehicle during the 2021 LA Auto Show … does that make this an EV play?! (Just kidding!)

In spite of supply chain worries, toy maker MAT has rocketed higher after delivering better-than-expected earnings last month, and telling investors that they expect the holiday season to be strong.

Chart courtesy StockCharts

Where’s this optimism coming from?

MAT owns much of its own supply chain, which gives it an advantage over competitors that must depend on outside players like factories and shipping lines.

MAT also said they anticipated the supply chain and labor shortages, and have spent months preparing and making moves to avoid disruptions and stocking issues.

In the options pits, at first glance you might assume that traders are bearish on the Barbie maker, with open interest showing puts outnumbering calls 1.7-to-1, and with seven of MAT’s top 10 open interest positions being puts.

However, three of the top five spots are January 2022 crash puts at the 3-strike, 8-strike, and 5-strike.

Does this mean traders are anticipating MAT essentially going bankrupt, and falling through the floor?

Quite the opposite, actually.

I would assume that most (or all) of these contracts are being used to hedge an underlying long position … which actually bodes quite bullishly.

Otherwise, looking past the November contracts that just expired, the January 2022 25-strike call is actually the most popular among options traders: another bullish sign.

Personally, I would not be surprised to see MAT continue to move higher, especially if retail sales live up to expectations, and they’re able to keep their products on shelves when others are not.

Alliance Resource Partners (Ticker: ARLP)

Now, for those of you on the naughty list this year …

You just might get a little something in your stocking from ARLP …

(I know, I’m hilarious.)

But seriously … we’re headed towards an energy crisis, making energy a great sector to be in right now, even with the oil slide on Friday.

Did you know that all the coal that will be mined in 2022 is already sold?

That bodes well for coal miner ARLP, who has already been doing quite well in the fossil fuel space for some time now:

Chart courtesy StockCharts

The shares are currently heading towards potential support on the charts, and I wouldn’t be shocked to see buyers stepping in and giving the shares a continued boost like we started to see on Friday. 

In the pits, options traders are already piling on, with current open interest showing calls outnumbering puts 2.4-to-1. Though volume was light on Friday, open interest is at 105% of its typical levels, so the stock is definitely grabbing a few more eyeballs than usual.

Bill Griffo actually gave out a few specific ways to play ARLP during his live appearance on Friday.

Click here to see what he has to say, and how he plans to trade it!

Your Only Option,

Mark Sebastian

What This Big VIX Trade Tells Us

The Option Pit VIX Traffic Light is Red: Volatility Is Likely to Drop.

Hey Traders,

On Thursday the VIX was up and the SPX was up at the same time …

Not usually a good thing.

If this continues, we might switch the Option Pit VIX Traffic Light …

But …

Here is another reason:

On a light day for VIX option trading (only 388k contracts traded), a customer came in and executed this trade:

The customer bought the December 21 straddle paying $5.45.

This is slightly in-the-money, and VIX December futures are about 20, so it leans bearish …

But that is not what is important.

What is important is that this trader only makes money if VIX makes a wild move.

He or she needs the VIX below 16 at expiration, or above 26.

Either way, that would be a big move for the future.

We have seen VIX expirations in the 16’s (like Wednesday) …

Last month, VIX did settle at 15.35 …

But outside of that, there is not a lot that would make a trader hopeful …

Unless VIX is really getting set up to die in December.

Remember the CBOE SKEW Index (Ticker: SKEW) is back to normal, and volatility in the overall S&P 500 is low:

10-day, 20-day, and 30-day day historical volatility (HV) are all below 9.

VIX might be set for a drop …

On the other hand, we could see a pop …

That would be more in line with what many retail traders are looking for.

The basics of this trade is that it is probably a hedge, where the trader is looking to break even or better if the VIX falls …

And clean up if the VIX pops…

Your Only Option,

Mark Sebastian