The Option Pit VIX Traffic Light Is Red: Volatility is likely to slide.

Hey Traders,

The S&P 500 rallied 30 points on Tuesday, a day after it rallied more than 40 points.

The VIX did actually fall, but only by .40 points, which is small relative to the rally. But it’s some proof that the bid from Monday might have been event related.

That’s why it might still be bid leading into Wednesday … which happens to be the FOMC meeting and press conference.

With that said, the VIX is still only 14.60, and leading into the FOMC, I think implied volatility is cheap.

Take a look at the straddle for Wednesday expiration:

The at the money straddle for Wednesday is about 33 dollars.

We moved about that much on Tuesday.

In fact, the straddle for Friday also seems really cheap:

50 dollars will buy you all the movement between now and Friday’s close.

That is a buy.

To hedge, use a VIX put, which should work …

Unless this is actually the end of a short squeeze.

If we see a rally on Wednesday and the market goes higher but VIX stays strong – sell the call,  sit on the put, and sell the VIX put.

We could see a drop into quadruple switching.

Questions about that? Leave a comment below!

Your Only Option,

Mark Sebastian