Is It Time To Start Being A Bear?

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

Hey Traders,

With the Option Pit VIX Traffic Light yellow, I expect to see some serious trading in the VIX.

Yet Wednesday was incredibly light for volume.

In fact, VIX open interest is down by 20%!

Here is the troubling part …

The VIX was down on Wednesday, and is trading back below 18.  

On the day, it had a decent range trading both up and down.

This is why when I looked at the stats for the day, I was surprised how light volume was.

Then I looked at VIX open interest  and saw that it’s down 20%.

Take a look:

Here is the interesting part: call open interest is only down slightly from normal open interest (about 13%).  

Puts on the other hand … the open interest is off by 34%!

That is a huge drop in put plays.

What is going on?

The answer is the macro environment …

As I stated yesterday, there is so much news to parse through …

It’s no wonder the market is confused and not trading VIX!

Once we see some resolution in the Chinese stock market, maybe then we will see VIX put volume run hot again.

I may take a page out of the ‘Hedge Fund playbook,’ and try to find some trades that other traders are missing.

(That’s what Frank Gregory and Andrew Giovinazzi help me with. You’re coming to their live special event tonight, right?)

In the meantime, I think I would be looking at stocks on CBOE, and getting a little bit bearish.

This type of drop in volume is VERY bad for the CBOE …

It might be time to look at puts.

Your Only Option,

Mark Sebastian

Macro Noise Giving Me A Hint Of Green

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

Hey Traders, 

Well that did NOT last long.

As I stated yesterday, the light was barely in red territory as it was.

And now, one of my indicators is essentially about to flip to green!

There’s so much noise out there, it can be hard to sort through what matters, and what doesn’t.

Luckily, that’s what my Option Pit VIX Traffic Light is for … and why we use the four indicators.

It also helps that I have a guy like Frank Gregory around to help “cut through the noise” when I need him. He’ll tell you how he’s able to do just that to find the trades other people miss during our presentation tomorrow night — you’re coming, right?

Here is the story I’m seeing right now …

There are so many crazy macro things going on right now …

China … inflation …

Plus, we have mega cap earnings all week!

Yet … we’re only 20 points away from an all-time high in the market.

But with all this macro risk, one of my indicators has flipped from red/yellow to essentially green.

Take a look at the relationship between the VIX and the S&P 500 (Ticker: SPX) …

Yes, some of the drive up in VIX is probably related to earnings …

But in the last month, the S&P 500 is up about 50 points, and the VIX is up 3!

At this point, I am going to be looking to find some strangle/straddle type of plays in VIX …

Likely long puts in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) vs a long call spread in VIX.

There is just way too much macro noise to put all my eggs in one basket.

But like I said, it’s nice having my indicators, and a guy like Frank around who knows how to filter through the news and political noise to pull out the nuggets of what actually matters. He’ll talk about how he’s able to use this in his trading tomorrow night, so if you want to learn how he does it, you can click here sign up!

Your Only Option,

Mark Sebastian

Getting The Whole Story From Unusual Volume

Hey Traders,

By now, if you’ve opened any Option Pit emails at all over the last few days, you’ve probably heard about the big “Hedge Fund Secrets Revealed” event we’re having on Thursday. (There’s still time to sign up here, but don’t wait too long!)

And there’s a reason we’re going so hard on this “hedge fund” angle … 

Because it matters.

The reason I (and many other traders) keep such a close eye on unusual trading volume is because many times, the biggest trades of the day are backed by some big bucks … and that usually indicates there’s “smart money” involved. And that “smart money” may or may not have information, or ways to trade, that the retail crowd hasn’t caught onto yet.

But you need to be careful you aren’t just spotting big volume and taking it at face value, because a lot of times you’re only getting a partial story!

For example, yesterday there was some heavy volume in this petroleum company’s pits that, taken at face value, would have told a completely different story than what was actually happening.

Here’s why sometimes you need to dig a little deeper to find the story (and that’s why you have Option Pit!).

Pass The PBR

No, not that kind of PBR – I’m talking about Petroleo Brasileiro (Ticker: PBR), a state-owned petroleum corporation headquartered in Rio de Janeiro, Brazil.

PBR hasn’t had an easy road since COVID hit – while the shares traded over $16 in 2019 (their highest price since early 2015), the pandemic saw the petroleum company plunge from the $15 mark to hit as low as $3.78.

Chart courtesy StockCharts

While the shares have gradually recovered — creating a series of higher highs and higher lows on the chart since hitting their pandemic bottom — the stock is currently staring at its just-overhead 20-day and 50-day moving average, which could pose a threat of double resistance for any further moves higher.

Yesterday, as I was watching heavy-volume trading in the market, I noticed some unusual put volume coming out of Petrobras’ pits.

With the shares trading near $10.70, two interesting orders came in:

      • 35,000 contracts of the July 30, 10-strike puts were purchased for $0.03.
      • 35,000 contracts of the July 30, 10.50-strike puts were sold for $0.09.

A pretty clear bull put spread, right?

Not so fast.

Looking at solely trading volume only tells you part of the story – and that’s where it’s easy to get into trouble.

Because these trades were actually bought and sold to close.

It looks like the original trades were opened on July 21, with 32,500 contracts of the July 30 10-strike puts sold for $0.04, and 32,500 contracts of the July 30 10.50-strike puts purchased for $0.18. 

Data courtesy Trade-Alert

(Since 35,000 contracts were closed on Monday, I think it’s likely that the extra contracts were opened at either a different time, or the original order for 35,000 contracts wasn’t filled in one fell swoop, but rather filled in several increments throughout the day. Total trading volume of over 35,000 in each of these contracts on July 21 does seem to support my suspicions.)

That’s a bear put spread, and that tells me something totally different about how Smart Money is trying to play this one.

Now instead of this trade indicating someone with very deep pockets is moderately bullish on this stock, instead I’m seeing the opposite – and I’m seeing their trade didn’t quite pan out like they had hoped!

Why does this matter?

It tells me totally different things about how smart money is playing the trade, and therefore I get a totally different message about which way “informed sentiment” may be leaning.

After all, there’s a big difference between trying to make $210,000 by betting a stock will stay above the near-the-money strike …

And betting $490,000 that the stock is going down! (That’s assuming all of the original 35,000 contracts were filled at the same bid/ask).

Now, to be clear, I’m not at all saying you need to dig into big volume trades so you can go out there and try to make the exact same trades yourself.

I’m just saying that spotting trades like this can give you valuable insight into what “smart money” is thinking, so be sure you’re getting the right insight.

I know it can be tricky to really get the whole story … but that’s what Option Pit is here for! 

In fact, tomorrow evening our resident Wall Street/Washington expert Frank Gregory will be telling you how he “cuts through the noise” to find trades just like hedge funds do. It’s going to be a good one, so make sure you’re registered here!

 Your Only Option,

Mark Sebastian


Toeing The Yellow Line

The VIX Light is Red (Barely): Volatility is Likely to Fall.

Hey Traders,

While the Option Pit VIX Light is red, I can tell you the market is still on edge.

Three of four indicators are still teetering on yellow.

I will definitely be keeping a close eye on things as we go into the rest of the week, with big events like mega-cap earnings in store (and as we get closer to our Hedge Fund Secrets Revealed event on Thursday — sign up here if you haven’t already).

Three of my four indicators for the VIX light are near yellow.

The VIX Volatility Index (VVIX) is still high, although it is dropping some.

VIX volatility is still high.

And most troubling …

The VIX is up 2.5 points over a period where the S&P 500 is up 70 points!

This might be why the VIX futures curve is so flat looking out past August:

While August is at a steep premium to the VIX spot price (about 2.5 points), and is trading somewhat reasonably under September …

Once we get to September,  the whole curve flattens out.

Why does this happen?

The market is nervous.

August futures premium is high, because traders are buying futures.

More importantly,  the flatness of the back end of the curve speaks to how near-dated some of the fears expressed in VIX are.

I think traders are nervous about another rough August, specifically close to Labor Day.

I would NOT be going whole hog short futures here…

That said, a smart calculated play makes a ton of sense.

We did a long VIX put trade vs a long Invesco QQQ Trust Series (Ticker: QQQ) put in my Volatility Edge trading program today.

The trade wins if vol drops, and it wins if the market drops.

The only way it loses is if the “Climb of the Wall of Worry” continues for a lot longer …

Your Only Option,

Mark Sebastian

The Most Interesting Mega-Cap Earnings Play

Hey Traders,

It’s no secret that this is a huge week for earnings.

Just about every giant company reports this week.

Notably all of the megacaps report this week: Apple (Ticker: AAPL), Amazon (Ticker: AMZN), Microsoft (Ticker: AMZN), Facebook (Ticker: FB), Alphabet (Ticker: GOOGL), and Tesla (Ticker: TSLA).

But here’s the funny thing …

Volatility is cheap right now.

Even though this is the week for earnings, and all of the mega cap stocks report by Friday.

So here is the incredible thing …

Invesco QQQ Trust (Ticker: QQQ) — an ETF that tracks the Nasdaq 100 (Ticker: NDX) — volatility is actually really REALLY cheap:

Nasdaq 100 Volatility Index (Ticker: VOLQ) is the at-the-money (ATM) volatility index for the NDX.

Right now, it is about as cheap as we have seen it in the last six months, at 17.05 …

And that is crazy, considering all the earnings coming out!

What’s more, skew (the difference in volatility between strikes, or the cost of out-of-the-money options relative to at-the-money options) is actually pretty cheap.

The CBOE Nasdaq 100 Volatility Index (Ticker: VXN), which is the VIX of the NDX (so it looks at the entire options curve, rather than VOLQ which looks at ATM options) is only marginally higher, trading at 20.74.

The spread between the two — which gives us a really good look at skew — is only 3.7.

That is not high or low; it’s pretty normal actually.

So what does all this mean?

The QQQ might be the most interesting play on mega-cap earnings.

If you think mega-caps are going to the moon, calls might be in order.

My take? The run on earnings already happened. I will probably try to play puts early this week on QQQ.

Your Only Option,

Mark Sebastian

A Mega Week For Mega Caps

Hey Traders,

Finish this sentence: “If I had a time machine, I would …”

I know most of you are probably thinking “I would fast-forward to Thursday’s Hedge Fund Secrets Revealed event so I can learn how to use hedge fund ‘secrets’ for my own trading!”

But I bet some of you also thought “I would go back and invest in Google/Amazon/Apple/etc.”

And who could blame you? If only we had a crystal ball to spot the next mega-cap …

Sadly, no such thing exists. 

But if it did … this would be the week to use it! We have mega cap earnings galore over the next few days, so be prepared to see some waves as the biggest names on the market take their turn at the earnings confessional. 

You’ve probably already heard my take on Apple (Ticker: AAPL) earnings, which are slated for Tuesday.

But let’s take a look at some of the other behemoth earnings coming out in days ahead.

Tesla (Ticker: TSLA)

Tesla kicks off the week, reporting earnings after the market closes today. The EV giant is expected to report a 90% year-over-year growth in revenue to $11.4 billion, and more than a 110% growth in earnings per share.

Looking at the last eight quarters, TSLA has finished higher in the session after earnings only three times, with a median move of just 2.4%. This time around, it looks like options plays are pricing in about a 7% swing, judging by current at-the-money straddle prices. 

In the pits, options traders are getting quite a deal on pre-earnings TSLA, with its 30-day at-the-money implied volatility (ATM IV) sitting in the bottom 5% of its annual range. Of the options expiring on Friday, July 30, out-of-the-money options seem to be attracting the most attention, with the 500-strike puts holding the heaviest open interest, and the 750-strike being the most popular on the call side. However, looking at near-the-money options, the 640-strike puts and 650-strike calls are the top open-interest positions.

Microsoft (Ticker: MSFT): Tuesday, July 27

AAPL will have to share the spotlight on Tuesday, as rival Microsoft is also due to report earnings after the closing bell. Hopes are high that working and learning from home will help boost the tech giant’s year-over-year revenue to $44.1 billion from last year’s $38 billion. MSFT has a history of out-performing expectations, though, so it’ll need a heck of a win to surprise traders.

Of the last eight quarters, MSFT has actually finished higher in the session after earnings five times, with a median move of 2.4%. 

One-year chart of MSFT with earnings notated.

It looks like options traders aren’t pricing in a significant move for the shares, with a July 30 at-the-money straddle indicating about a 3.2% swing expected. MSFT’s 30-day ATM IV is also rather low ahead of earnings, in just the 14th percentile of its 52-week range.

If we take a look into MSFT’s pits, of the near-the-money July 30 options, traders are targeting the 297.5-strike calls, while the heaviest open interest in near-the-money puts lies at the 272.50-strike.

Alphabet (Ticker: GOOGL): Tuesday, July 27

Tomorrow will certainly be one for the books, with mega cap Alphabet also slated to report. The Google parent company is currently trading near all-time highs, and is expected to outperform the other FANG stocks, and outperform already-high expectations that foresee the tech giant reporting profits of nearly double the year prior. No pressure, right?

One-year chart of GOOG with earnings notated.

GOOGL has moved higher in its after-earnings trading session three of the last four quarters, and currently at-the-money July 30 straddles are pricing in a post-earnings swing of 4.3% — larger than GOOGL’s median 3.3% move.

Digging into July 30-term, near-the-money options, GOOGL’s 2,700-strike calls hold the most call-side open interest, while the 2,600-strike puts are the most popular on the put-side.

Facebook (Ticker: FB): Wednesday, July 28

Boosted by positive results from Twitter (Ticker: TWTR) and Snap Inc. (Ticker: SNAP) earnings reports last week, the OG social media stock Facebook is expected to report Q2 revenue of $27.8 billion — a 49% year-over-year increase.

With FB shares seeing a median post-earnings move of 5.8%, it looks like options players are expecting more of the same from Facebook, with July 30 straddles showing a 5.7% post-reporting swing being expected. As far as the direction, it could go either way, with the tech stock moving higher and lower in the session after earnings four times each over the last eight quarters.

Looking at July 30 near-the-money strikes, the 320-strike puts hold the highest open interest, versus the 370-strike calls, which hold the highest open contracts on the call-side.

Amazon (Ticker: AMZN): Thursday, July 29

The Street is also expecting an earnings outperformance from online retail giant Amazon, with an expected year-over-year revenue increase of 29%. This quarter marks the last of the Jeff Bezos-led era, so investors will also likely be listening closely for any hints of future performance, though AMZN typically doesn’t issue guidance.

Looking at near-the-money open interest, the heaviest open interest strike on the call side is at 3,700, while put players seem to be targeting the nearby 3,680-strike — both higher than where AMZN is currently trading at $3,656.64.

At-the-money straddles indicate about a 4.5% post-earnings swing being priced in, higher than AMZN’s median 2.8% move over the last eight post-earning sessions. In spite of the trillion-dollar company’s habit of blowing earnings expectations out of the water, the shares have actually ended lower after six of the last eight post-earnings trading sessions. It seems like AMZN traders typically have quite high expectations, and there’s not much reason to believe they’ll settle for any less this time around!

Now, these are hardly the only important earnings we can expect to see this week.

Be sure you’re checking the earnings calendar, not only to watch the big names, but to make sure you know when earnings are slated for any companies you’re currently trading. I’ve mentioned before that I don’t like to hold through earnings, so I advise you to at least know the dates you should be closely watching to avoid any surprises.

Your Only Option,

Mark Sebastian

How Options Traders Are Playing These 4 Gaming Stocks

Hey Traders,

Gaming stocks have been a stand-out topic for much of 2021 – from GameStop’s (Ticker: GME) meteoric meme stock rise, to Netflix’s (Ticker: NFLX) recent announcement that it intends to add mobile gaming as part of its streaming service. 

As lockdowns ease, you might expect this hot sector to cool … and it has, but only slightly, with the recent slowdown expected to only be temporary.

After all, there’s only so much sunshine and socializing to be had before many of us feel like retreating back into the comfortable embrace of our own living room again … right?

However, even with recent upbeat video game sales data, and expectations for future growth in the sector, not everyone seems to be hopping on the gaming bandwagon … hedge funds have been shedding their holdings of Communication Services Select Sector SPDR Fund (Ticker: XLC) at a notably rapid clip. XLC holds a variety of communication and gaming stocks, and video game all-star Activision Blizzard (Ticker: ATVI) is the fund’s tenth largest holdings.

Now, heavy hedge fund selling doesn’t necessarily indicate anything about the state of the sector … but it could. We’ll talk all about how hedge funds often get the jump on trading trends ahead of the general public, and how you can actually trade like this yourself on Thursday, July 29, at 8:00 p.m. EST. You can register here.

In the meantime, let’s take a closer look at these 4 gaming stocks to see if we can make sense of the trends.

As I said, the popularity of video games is really showing no signs of slowing, in spite of loosening COVID restrictions. 

June video game sales were up 5% year-over-year, and gaming hardware sales were up a whopping 112% year-over-year!

And while Gen Z cites gaming as its preferred pastime (over listening to music, surfing the internet, and even watching television!), it isn’t just the young guns getting in on the fun:

U.S. video game audiences in 2020, by age group. Image courtesy of Statista

And maybe it’s inter-generational love of gaming that’s inspiring this streaming stock to add to its arsenal …

Netflix (Ticker: NFLX)

Netflix recently announced its intention to add mobile gaming as a part of its subscription package, as an attempt to boost the disappointing user-growth the streaming giant projected at its most recent earnings call.

NFLX plans to develop games in-house, though licensing deals with established gaming companies may also be in the works.

Unsurprisingly, NFLX was one of the biggest pandemic gainers (remember Tiger King?), but it’s recent subscriber growth drop-off has weighed on the shares, currently sitting at $515 after hitting $593 earlier this year.

NFLX is now planted under its 200-day moving average, which an area of recent resistance. However, the important round-number $500 level has not yet been breached, and NFLX’s 50-day moving average may also act as support from the shares’ post-earnings sell-off.

Chart courtesy StockCharts

In the option pits, even though put option open interest is at an annual high, NFLX’s put/call volume ratio of 0.66 is relatively middle-of-the-road, suggesting trader sentiment may not actually be much more put-skewed than usual.

However, NFLX options are about as cheap as you’re going to find them, with NFLX 30-day at-the-money implied volatility (ATM IV) hitting an annual low on Friday, indicating options traders are pricing in exceptionally low volatility expectations.

If you’re going to make a move on Netflix, now may be the time to act, with the shares still wallowing near their post-earnings low, and options on sale.

Activision Blizzard (Ticker: ATVI)

Activision Blizzard was another name that thrived during the pandemic lockdowns, with the shares rocketing higher during the first half of 2020 and — after a brief breather — resuming their journey higher into 2021:

Chart courtesy StockCharts

Recently, though, ATVI seems to have run out of steam, and a new lawsuit over toxic workplace culture certainly isn’t doing the video game maker any favors.

Headed into earnings on August 3, ATVI is expected to report a year-over-year earnings per share decline of over 20% — which could explain why traders in ATVI’s pits are more put-skewed than usual. ATVI’s put/call volume ratio is currently in the 72nd percentile of its annual range, with put open interest in the 94th percentile.

It seems like options traders are pricing in a slightly larger-than-average post earnings move, judging by ATVI’s post-earnings straddle indicator. With ATVI posting a median move of 2.5% in the session after earnings over the last eight quarters, this time around a 5.9% swing is being priced into ATVI’s ATM options.

Electronic Arts (Ticker: EA)

Another big name in gaming, EA has also been side-winding over the last several months, after acquiring Glu Mobile (Ticker: GLUU) in a $2.4 billion merger in late April.

Chart courtesy StockCharts

Looking into EA’s options pits, call open interest is currently higher than all but 14% of readings taken in the last 52 weeks. EA’s top open interest position is the July 30 144-strike call, indicating traders think EA will hold steady ahead of its earnings call on August 4. After earnings, it looks like up to a 6% swing is being priced into ATM straddles — larger than EA’s median 3.5% post-earnings move.

GameStop (Ticker: GME)

GME may not technically be a gaming stock, in the sense that they don’t develop their own video games, but this meme stock has definitely been one of the most exciting names to watch in 2021.

Chart courtesy StockCharts

GME doesn’t report earnings until September 7, but so far, options traders are pricing in a whopping 31% post-earnings move! This is in comparison to GME’s median post-earnings session swing of 15.1% over the last eight quarters.

Call open interest is only in the 14th percentile of its annual range, with 2.32 puts open for each call, indicating traders are more put-skewed than usual.

Interestingly, GME options buyers are getting in at a bargain right now. GME’s 30-day ATM IV is lower than 97.5% of all other readings in the last 12 months — that’s shockingly low, given its meme-stock status and upcoming earnings report.

Looking at post-earnings options contracts, there is a stark difference between the most popular call and put. The highest open interest position is the September 250-strike call, with 2,420 contracts open. On the put side, the September 150-strike put is the most popular, with just 914 contracts open. It will certainly be interesting to see which side will pile on as earnings draw near.

So in spite of upbeat video games sales forecasts, it seems some of the biggest gaming names are feeling pressure in the options pits. Could this be why hedge funds are pulling out of XLC?

Remember, if you want in on “hedge fund secrets,” we’re cracking open the vault and spilling all the details on July 29 at 8:00 p.m. EST. Register now to save your spot!

Your Only Option,

Mark Sebastian

Is This A Mellow Yellow?

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

Hey Trader, 

Now that the market is right back near all-time highs, I’m sure you were expecting a red light on the VIX traffic light.

Well, we’re not there yet!

Of course, the yellow light certainly hasn’t stopped me from fading vol … I just closed out a tidy 15% win (in under four hours!) yesterday in my Robinhood Trader program … you can see the details here.

However, there are still a few things I am seeing out there that have my light holding onto yellow …

Here’s what’s going on, and how to trade it.

The market is at an all time high …

The VIX is back below 18 …

We should be at a red light on the Option Pit VIX Light, right?


That is not how this thing works!

The VIX is still in a position to potentially make a wild move.

Why? Let’s take a look.

Let’s start with the VIX itself.

The S&P 500 (Ticker: SPX) is just a couple of points off an all-time high …

The VIX though, is still parked at almost 18: 

On Wednesday, July 14th, the VIX closed at 16.30. Currently, it is sitting at 17.69. That’s over 1.25 points higher!

As for the VIX futures curve …

Yes, it’s in a contango (futures trading higher than spot), but the spread between August futures and the VIX cash is a mile wide; a sign that there is still a bunch of fear out there …

The CBOE VIX Volatility Index (Ticker: VVIX) is still at nearly 120:

Collectively, the above factors produce a yellow light.

So what does this mean? Is the VIX going to shoot up to 25 or 30?

Not necessarily. It could make a run over 20, or it could make a dive to 15. A yellow light means we are going to see movement, not a certain pop higher (that’s when we see a green light).

So how am I trading this?

I think puts are pretty cheap in August. Specifically, the 18-strike puts for $0.95 are pretty cheap.

However, I would hedge a trade like that with a call spread of some kind (to take advantage of the NASTY call skew — the difference in volatility between strikes — in VIX).

The 20-30-strike call spread for August only costs about $1.45. That’s not a bad price.

I’ll have a new trade to discuss tomorrow during our Option Pit Live Trading Room. If you were lucky enough to get in on the deal last week, be sure you’re tuning in today.

If you missed it, I’m sorry to say we had to shut that deal down. If you give us a call, though, maybe we can find some wiggle room … (888) 872-3301. Tell them you’re with VIX Edge.

Your Only Option

Mark Sebastian

The Market Is Back, The VIX Is Not

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

Hey Traders,

The market is now about even with where it ended on Thursday, July 15th.

But that does not mean that all is well.

There’s a reason the Option Pit VIX Traffic Light is still yellow.

Here is what that reason is, and what to do …

Less than one week ago, the S&P 500 (Ticker: SPX) was about where it stands now.

However in that time, the SPX has seen some serious movement.

This might be the reason that despite the S&P 500 recovering, the VIX has not.

Take a look at the change in the VIX futures curve:

The VIX itself is higher by about a point.

But more importantly, the VIX futures curve has totally shifted higher.

Until the futures curve falls back even with its old levels, it’s hard to argue that a move back to a red light makes sense.

Now, that said, this doesn’t mean I don’t want to fade volatility … I do … 

And I have been playing it this whole time (you can see some of those trades here.)

I just can’t go in full force until things fully normalize.

In the meantime, I like August strangles.  

Take a look at current option prices:

I can buy the August 18-strike puts and buy the August 20-25-strike call spread as a package for about $2.

I can make money trading off of that spread.

Your Only Option,

Mark Sebastian