Is The VIX Getting Tired? These 4 Signs Say Yes.

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

Hey Traders,

Through the close on Thursday, the market continued to be unable to find its footing. The S&P 500 (Ticker: SPX) failed for three days in a row to hold a rally …

Is the VIX going to 40?

It’s possible …

But I am continuing to see ‘red shoots’ for VIX in the way it is trading.

The VIX appears to have stalled out for the time being …

Over the last three days, in spite of the SPX’s wild swings, the VIX has been floundering:

While a VIX over 30 is nothing to ignore, the fact that it is holding in place may be a sign that we might be reaching selling exhaustion.

It doesn’t mean there won’t be another leg higher, but we could be due for the index to back off.

Another major sign the VIX is getting tired? The futures.

The futures curve has dropped for three days straight:

While we are still in backwardation, the steepness has declined significantly, especially at the front end of the curve.

Also, VVIX – the VIX of VIX – dropped again:

Most importantly though, SPX and VIX were both down on Thursday…

If we see a day where the SPX is up and VIX gets crushed, or SPX is flat (or down) and VIX drops, that could confirm we are near a bottom for SPX.

So what is a trader to do?

We flip our hedge trade with a put around.

I would look to buy the Feb. 22-strike puts (options that have been EXTREMELY active over the last few days) …

And pair those with a call spread in VIX buying the Feb 30-40 call spread for $1.80, on a ratio of about three puts to one call.

This is a trade like one we will likely be executing in Volatility Edge …

Your Only Option,

Mark Sebastian

VIX Below 20? Might Be Sooner Than You Think.

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

Hey Traders,

On Wednesday the market looked like it was ready to take off …

Then the Federal Open Market Committee (Ticker: FOMC) came out, and the S&P 500 (Ticker: SPX) dropped like a stone.

On the day, the SPX had a range of over 120 points.

This is NOT low volatility!

On Wednesday, the S&P 500 could not end the day positive.

Despite being up most of the day, the post-FOMC Jerome Powell news conference was enough to send the S&P 500 tumbling.

In the end, VIX futures ended up at a new high close for the cycle.

And the VIX futures curve?

VERY backward:

On a day like this, I would have expected a rush of call buying into the close.

That did not happen.

In fact, check out the top 12 trades on the day:

THEY ARE ALL PUTS!

Puts outpaced calls nearly two-to-one, on really strong volume:

Traders were buying complex spreads, put spreads, and outright puts on Wednesday.

So what gives?

Remember, these traders are playing mean-reversion…

Now that the FOMC is out, it is going to take a couple of days to digest, and we could see some fireworks …

But also remember VIX has been taking the elevator up and down as of late, and these traders appear to be banking on a trip below 20 by February 16!

We shall see …

Your Only Option,
Mark Sebastian

How Will You Know When The Selling Is Done? Watch This.

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

Hey Traders,

We had another wild day in the markets on Tuesday …

The S&P 500 (Ticker: SPX) went from down over 100 … to up on the day … only to close down 53.

While I think we might be getting to the end of the selling, it is far from a sure thing.

We are not out of the woods …

The Option Pit VIX Traffic Light briefly went red on Tuesday …

But it did not last.

In the end, the VIX closed over 30, and the VIX futures curve is still in a heavy backwardation:

In fact, despite the midday rally, VIX futures actually went up:

And not by a small amount!

This is a pretty strong argument that we are NOT out of the woods.

On the other hand, we have VVIX … the vol of vol:

The index seemingly is topping out …

So what is to make of this?

The VIX is going to move.

We are likely to have another strong day for VIX in the near future.

But at the same time, the panic selling might be over.

So how do YOU know when the selling is done?

Watch ARK Innovation ETF (Ticker: ARKK).

On Tuesday, ARKK implied volatility (IV) was only up a smidge:

This is despite it being down nearly 4%.

When that IV drops two days in a row …

It’s probably time to go long.

Your Only Option,

Mark Sebastian


Has The Market Hit A Bottom? This Says Yes.

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

Hey Traders,

After spanning more than a 10-point range during Monday’s wild trading session …

The VIX closed under the 30-handle.

And although the VIX is up slightly on the day so far on Tuesday …

I have changed the Option Pit VIX Traffic Light to red.

Why would I do this, when the VIX is up on the day, and over the 30-handle?

And if volatility is indeed ready to fall … does that mean the market has hit a near-term bottom?

Here is what I am seeing.

First, let’s take a look at the VIX pits.

There is some notable volume crossing the tape so far on Tuesday …

Including this far-out-of-the-money call spread hedge:

Why would a 60/70-strike call spread actually be bearish for vol?

Well, when traders purchase hedges that are far out of the money – like this trade – it is actually a sign that they are less nervous than if they were purchasing near-the-money call spreads.

Think about it … if you think vol is going to drop, are you going to buy expensive, near-the-money, upside hedges?

Or are you going to spend less on “just in case,” further-out-of-the-money hedges?

This is telling me that this trader is preparing for the worst … but does not actually think that “the worst” is likely to come to fruition.

If they thought the VIX was really ready to go higher, they would have spent more on a hedge more likely to make money.

Now here are some more trades out of the VIX pits today …

These sizable put spreads are also bearish for vol, because it shows me that this trader is looking for volatility to drop by February VIX expiration …

So we have Smart Money traders laying down some big bucks betting on a drop in vol …

What else is telling me we could be getting ready to finally see some calmer waters ahead?

I am also looking at the VVIX, the VIX of the VIX …

We have talked recently about VVIX shooting higher, and it has.

But has it finally topped out?

This chart shows me that might be the case …

After climbing as high as 172 on Monday, the index dropped lower into the afternoon …

And it is lower on the day during Tuesday’s trading session.

This indicates that demand for at-the-money hedges is tapering off …

Which may be a sign that volatility has finally topped out.

And if that is the case, we will see the VIX drop …

And when the VIX drops, the S&P 500 (Ticker: SPX) is likely to go up. (Remember, the VIX and SPX are negatively correlated, so when one falls, the other climbs.)

Of course, with the first Federal Reserve meeting of 2022 concluding tomorrow, an unexpected hawkish or dovish tone could send the market flying in either direction.

Our Head Income Trader Bill Griffo will be hosting a live post-Fed debrief tomorrow, Wednesday January 26, at 3 p.m. ET.

He’ll discuss the latest word from the Fed, what to expect next, and how to trade it for profits.

Griff is our foremost Fed expert here at Option Pit, and he knows how to trade Fed policy like no one else I’ve ever met.

You can sign up to join him here – it will be well worth the price of admission.

Your Only Option,

Mark Sebastian

Could The VIX Head To 50?

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

Hey Traders,

My research was featured on Mad Money on Friday. If you missed it, you can find it here.

We are in a very tricky market right now. On Monday, the VIX might finally be breaking out …

But is this the beginning of the vol explosion, or the end?

Let’s take a look.

The Option Pit VIX Traffic Light is green, and the VIX futures curve is in a strong backwardation:

VIX paper is all over the board, but there are two trends I am seeing …

There are lots of options traders buying nearer-dated calls in the VIX:

On Friday, we also saw a trader buy a put strip in June, to the tune of 375,000 contracts:

So what does all this mean?

It means that in the near term we could see continued heat on VIX, and it might even make a run at 50 or higher.

We also see traders betting that this move does not last forever, which is wise thinking.

For now, I would be looking to go long VIX call spreads, and hedge off some of the delta using the Feb. 20-strike puts, which are still cheap.

I’ll be putting out a trade for Vol Edge clients with this approach, likely today. 

Your Only Option,

Mark

Buckle Up For More Volatility

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

Hey Traders,

It has happened …

The Option Pit VIX Traffic Light is green.

After Thursday’s late-session sell-off and VIX pop, I knew there was a good chance that I would be changing the light during Friday’s trading session.

What was it that convinced me to switch the light to green?

After watching VIX shooting higher late on Thursday, and early on Friday, the VIX futures curve has now entered backwardation – so futures are trading below VIX cash price:


This is a sign that the market is really stressed, and traders are more concerned about near-term risk than future risk.

There is also the matter of VVIX … the VIX of VIX.

The VVIX tells us the vol of vol … or the change in vol of VIX options, giving weight to at-the-money (ATM) options.


The VVIX popped much higher on Friday … as high as 147, before paring its gains slightly.

Back before COVID times, any VVIX above 100 was considered high … but since the pandemic began, the index has really only tapped below 100 a few times, and briefly at that.

The VVIX popping indicates that demand for VIX options is growing … traders are hedging.

So with VVIX spiking higher, and VIX futures in backwardation … traders are nervous …

I think we could be in for a bumpy ride.

Your Only Option,

Mark Sebastian


Check Out This Big VIX Strip (And How To Trade It)

The Option Pit VIX Traffic Light Is Yellow: Expect Wild Moves In The VIX.

Hey Traders,

We had another day of the VIX going higher.

As the VIX was oscillating up and down for most of the day, I saw a customer come in with a really unusual order …

This customer stepped in and sold a pretty big VIX strip on Wednesday.

A “strip” is when a trader buys or sells a whole bunch of options up and down.

In this case, the trader sold four puts and four calls:

The trader sold puts at the February 18-, 20-, 21-, and 22-strikes.

Her or she also sold the February 26-, 29-, 35-, and 45-strike calls.

On the net, the trader collected a premium of $12.20 on the sale.

So what is the deal on this trade?

It kind of acts like a straddle when VIX is sitting at-the-money.

But as the VIX moves one way or the other, the trade gets progressively worse:

Because the strikes are so close together on the downside, this one does start losing money pretty quickly if VIX drops fast.

On the upside there is a little more wiggle room, because the strikes are spaced out.

So why do a trade like this?

I am pretty certain that this is not the only leg of the trade.

There is likely the other side of this trade sitting on the traders book that he or she filled as a variance swap against a client.

If it is not a hedge, then this trader is banking on the same pattern we have seen for months …

VIX threatens to break higher or lower, then moves back to the 20s.

If it is a hedge, then the trader does NOT want to be long volatility in his or her book.

This type of trade might seem irrelevant to some traders, but it is not.

A trader that wants to dump his or her long vol exposure is telling you something …

They do not think VIX is going to 50.

They also likely think VVIX (the VIX of VIX) is too high.

So how can you, the retail trader, play it?

I would look at 1-by-2 put spreads, and or broken wing flies using puts.

They can be a good way to get short volatility and still participate if the VIX falls.

I am going to put this spread together for Volatility Edge clients on Thursday

I will tell you the trade on Friday.

Your Only Option,

Mark Sebastian

Are We Headed For A Bounce … Or Break?

The Option Pit VIX Traffic Light Is Yellow: Expect Wild Moves In The VIX.

Hey Traders,

We continue to see the VIX bounce between over 22 and under 19. It has been making wild moves for some time.

The VIX curve is flirting with backwardation (where futures trade progressively lower than VIX), at least between the February future and the VIX cash index:

In fact, briefly on Wednesday morning, we did get there …

But then we bounced.

When the cash touches a future, it is either a point where markets bounce …

Or a point where the market breaks.

So far on Wednesday, it appears to be a bounce.

But without a real rally, VIX could still make that run at 30.

So how do I play it?

The Feb. 19-strike puts are $0.80…

They were $1.50 about a week ago. If VIX does falter, these will be in play.

Alternatively, if VIX pops, I have a whole month to sit on these …

Your Only Option,

Mark Sebastian

How To Trade the Incoming Volatility Wave

The Option Pit VIX Traffic Light Is Yellow: We Could See Wild Moves In The VIX.

Hey Traders,

The Option Pit VIX Traffic Light is now yellow, and we could be in for some fireworks.

Along with the VIX popping over 20, we are seeing other important volatility changes …

Notably, VIX volatility itself is climbing pretty rapidly:

We could be at the front end of a short wave of volatility.

VVIX has also been slowly climbing:

With VIX expiration tomorrow and a ton of open interest, we could see all kinds of movement on tomorrow's expiration.

The Jan. 19 23-strike calls, which are 100% in play, cost about $0.45, and the 25s are about $0.15.  

I might look at the VIX 23-25 call spread for $0.30 which has a really nice favorable risk/reward.

Looking at February, the 25-40 call spread only costs about $1.75; that is a really cheap hedge.

One could buy those and then the 19-strike puts for about $0.75  

Remember, the Jan. 19-strike puts traded over $2.00 at one point, so those 19-strike puts above are cheap.

Your Only Option,

Mark Sebastian

Until This Happens, The Market Will Stay Sick

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

Hey Traders,

Thursday was a bit of a blood bath, and Friday has some follow through.

But what is causing this selling? Why are we threatening 4,600 again in the S&P 500 (Ticker: SPX)?

And what does this mean for VIX?

Earnings season is upon us.

We saw some strength in the airlines on Thursday, though then that quickly evaporated.

The first of the big banks has reported … and it is not good.

So is that the reason the VIX is over 20?

No.

The answer continues to lie in the Nasdaq 100 (Ticker: NDX) and in ARK Innovation ETF (Ticker: ARKK) funds.

Compare the returns of ARKK (red) vs the Invesco QQQ Trust (Ticker: QQQ) over the last three months:

ARKK has taken a nosedive, while the QQQ is actually flattish.

Why?

Megacaps.

Here is QQQ (red) vs Apple (Ticker: AAPL):

Think of ARKK as being the non-megacap portion of the QQQ, and AAPL as a representation of the megacaps.

Underneath the flattish QQQ over the last three months, there is a lot of softness.

Remember, the non-megacaps represent about 52% of the QQQ value, but account for 93 of the 100 stocks in NDX.

Until ARKK recovers, the market is going to be sick.

That said, on a day we are down about 40 points in SPX, the VIX is not really reacting, and VIX futures are not really moving much.

Over the next day or two, we could be in line for an UGLY move in VIX, but it could be the final flush out in ARKK that causes that.

Once ARKK bottoms, the market might be in a position to begin a move higher.

Your Only Option,

Mark Sebastian