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

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

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

Another Big Trade in VIX

Hey Traders,


The VIX had a huge range on Wednesday, moving from a high of 25.04 to a close of 21.34.


When the dust settled, it was a range of 3.73 points after closing just off the lows.


If you are a Cboe Global Markets (Ticker: CBOE) shareholder, I have good news for you — there was decent volume in the VIX contract.


If you are bullish the VIX, I have bad news …


Almost all the large block trades were bearish the VIX between now and April.


The biggest trade I saw was an April 23-21 put 1-by-2.


A 1-by-2 trade involves buying one put closer to the money and selling two puts further out of the money.


This is the type of trade my Pro’s will execute all the time (although sometimes whey will do the less margin-intensive version of this trade called a broken wing butterfly).


The trader of a 1-by-2 is expecting the underlying to move in the direction of the play … but not TOO hard.


In this case the trade …


– Bought 30,000 of the April 23 puts at 1.52.

– Sold 60,000 of the April 21 puts at .72.


The net of the trade is a debit of .08. Check it out:



But Why?


To help you better understand why this trade is so great, let’s start by remembering that the underlying for April options is the April future … which closed the day at 26.85.


So, while the 23 puts are IN THE MONEY relative to the cash, they are almost $4 OUT OF THE MONEY when compared to the future …


If VIX just spins its wheels for the next month, this trader is going to make a LOT of money.


Because in about a month, if the VIX is at 21.34, the April contract will be trading about where the March contract currently trades.  


The March contract closed 23.85, three points below April.


Remember that the trader paid .08 for the 1-by-2 … and VIX March 23-21 put 1-by-2 is trading at .25.


While that might not seem like a lot of money, a 212% win on 30,000 contracts that cost you .08 is $510,000.


Not a bad return on risk …


Plus, if things go right for a trade like that, this spread will only expand in the coming days.


The same 1-by-2 in the options that expire NEXT week is trading .90.


That is over a 1100% winner for a patient trader.


The $240,000 cost of the trade is now $2.7 million.


PRO Move


We execute VERY similar trades in our Option Pit Pro trading room.


The only difference is, we will buy a cheap out-of-the-money put to reduce the margin and risk.


(By the way, I’m holding a first-of-its-kind reveal of Option Pit Pro today at NOON EST. If top-level education and lucrative trading opportunities like the one we’re discussing interest you, you should join us for this event.)


If I did it as a spread, I can pay less than .05 for the 16 puts.


Take a look at the risk profile:



I have almost no upside risk if the VIX blows higher.


My only real risk is if the VIX crashes …


This is a risk in an equity option, though not so much in a VIX future that tends to meander lower. (That’s due to VIX futures being European in style, meaning they can only be exercised at expiration, not before).


Basically, unless I take this trade into the final week of trading when the VIX futures start to REALLY react to VIX moves — or the VIX goes to 11 — I would have a very difficult time losing on this trade.


The Option Pit VIX Light Is Red, and volatility is likely to fall.


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


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

A YOLO Vacation


Hey Traders,


I often reference volatility indexes other than VIX in this space.


Last week, for instance, we talked about CBOE Energy Sector ETF Volatility Index (VXXLE).


I mentioned it was climbing and that I thought calls were going to pay …


They did.


The XLE March 46 calls I posted about are up 55%.




Anyway, arguably the second-most famous index next to the VIX is the VXN. (Not to be confused with 1980s female rock band Vixen.)


No, VXN is the CBOE Nasdaq Volatility Index, the VIX for the NDX (the Nasdaq 100).


This index makes the QQQ, an exchange traded fund (ETF) that includes 100 of the largest companies, both international and domestic, on the Nasdaq exchange. 


I regularly track the spread between the VIX index and the VXN index …


Typically, VXN trades at a 2-3 point premium to the VIX.


When the spread expands to 5 or 6, that tells me there is a bid for volatility in tech names …


When it tightens up, it indicates a bid for volatility on non-tech stocks (like banks and energy).


Take a look at how the spread has expanded in the last few weeks …



What does that show us?


The spread is touching 6.5 and appears to be growing.


At the same time, at midday on Monday, QQQ and SPY (the SPDR S&P 500 ETF) are down — but an ETF like RSP (equal-weighted S&P 500) is up.


Until I see the spread between VIX and VXN start to tighten, the QQQ pain is going to continue.


It appears that we are in the middle of a rotation out of the stay-at-home trade … and the new YOLO trade will be going on a YOLO vacation!


It looks like another week of the DJIA outperforming the S&P 500 index, as well, because the Dow is BY FAR the least tech-heavy of the major broad cap indexes.


The Option Pit VIX Light Is Red, and Short Volatility Plays Are Likely to Work.


Your Only Option,

Mark Sebastian

VIX-UAL Evidence

Hey Traders,

When the VIX complex is in contango (futures prices are higher than spot prices), holding VXX is a loser. 


This is the current VIX curve:

It is in a HUGE contango, with March trading 3.25 points above the VIX index.

What’s more, April futures are a monster 6.15 premium to the VIX index.

(A quick note for your visual learners: The above chart is a classic example of an especially large contango. … A contango unchained, if you will.)

Last Thursday, Feb. 11, the VIX index closed 21.25. Yesterday, it closed 22.49.

So VIX is up on the week …

Let’s take a look at the VIX over the VXX. How did the VXX fair in a rising environment:

What do we see above?

VIX is up … and in the last five days VXX has dropped over 1.00!

Money Moves

If you want to buy VXX because you think the VIX is going to go up, that’s fine.

BUT … wait for the VIX to start moving higher, instead of buying calls a week or two out in anticipation.

It is entirely possible that you can be right and the VIX runs higher — and you still lose money on your VXX puts. (The charts above illustrate such a scenario.)

Now, when we have a crazy contango (contango unchained!), as we do now, VXX puts are going to pay.

At noon on Wednesday, we bought VXX puts and hedged them with a small amount of call spreads …

The trade was up nicely by close — and continued to climb on Thursday.

That’s why we’ll be putting on ANOTHER contango trade at noon tomorrow in our Volatility Edge trading service

Now here’s a little something different, just because it takes two to, ahem, contango …

I will give you this trade for free!

All you have to do is pick up the phone starting at 12:30 p.m. today (Friday, Feb. 19) and call Option Pit Head of Customer Care Teddy Trapuzzano who will give you all the details — for free!

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

Your Only Option,

Mark Sebastian

The Lion & The Lamb

Hey Traders,

With February rolling off Wednesday morning, March is now the front month future …

And it is trading at an out-of-world premium to the cash.  

The VIX closed 21.5 Wednesday. Check out the VIX curve:

There is an INSANELY wide premium between the March future and VIX.

A two-point spread is about normal. Three would be considered inflated …

This spread is over 4.25!

That’s March coming in like a lion — very blustery, indeed!

Think about it … we  could see the VIX move UP and the future still lose money over the next few days.

With the way the market sell-off fizzled on Wednesday, there appears to be a pretty decent bid for the S&P 500 at 3900.

When sell-offs that seem to have legs turn around completely, we know there is an underlying bid.

With that in mind, it’s going to be pretty hard for VIX to explode higher.

I expect to see a 1-2 point drop in the March future (and potentially the whole curve with it) over the next couple of days.

This spells doom for the VIX Short-Term Futures ETN (VXX) and ProShares Ultra VIX Short- Term Futures ETF (UVXY).

UVXY is already below 10 and we could see another reverse split coming in that name. 

A higher price gives us a bigger drop when contango decay (which is calculated using a percent of the ETF’s price) is happening.

VXX has a daily decay of about .15 a day. This means that in a month it could be $4.50 lower.

Remember VXX attempts to replicate the return of a 30 day future. It does this by owning a basket of VIX futures.

When the VIX looks like it does above, the fact that on most days the futures are falling TOWARD the cash index causes VXX to decay.

UVXY is the same, only 1.5X VXX plus all the problems that come with leveraged ETFs.

The Option Pit Trade

We built a trade in our Trading Legion mentoring program that takes advantage of this potential VXX/UVXY drop and is still hedged.

Even with the cost of paying for the hedge, we see huge edge in our long puts.

I think we will see VXX sub-15 by the end of the week, maybe even 14.5.

By the end of the month it will be in the 13s.

That’s positively lamb-like!

The VIX Light Is Red, and Volatility Sales Are Favorable.

Your Only Option