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

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

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

Why Today Is So Big For The VIX

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

Hey Traders,

If you had left on Friday and didn’t look at the S&P 500 (Ticker: SPX) until Tuesday afternoon, you might think nothing had happened …

Oh, but things happened!

The market is seriously volatile right now.

In addition … we have VIX options and futures expiration today!

With July derivatives rolling off, some things are going to change dramatically for VIX, iPath Series B S&P 500 VIX Short-Term Futures ETN (Ticker: VXX), and ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).

Here is what is happening, and what to do …

The S&P 500 is essentially where it closed on Friday … the VIX? Not so much …

Take a look. The top chart is the SPX, the bottom is the VIX:

The S&P 500 is essentially flat over the last five days …

The VIX is up about three points.

The reason? Well, volatility has really ticked higher.

Before today, the last two days brought moves of 1.5%, and about a 22 VIX, if you’re basing it on realized volatility.

Part of this has to do with the VIX expiration today (Wednesday) …

There is a lot of open interest in July VIX futures and options.

With all the flying around the VIX has been doing, and July VIX futures super-sensitive to VIX movement, the gamma (which measures the change in delta — see our glossary here) created by July options has had a profound effect on the VIX blow-up.

August is not nearly as active so far as July was.

July options have ten strikes with over 100,000 open interest, and several with more than 200,000 open contracts …

August only has four strikes with over 100,000 contracts open, and ZERO strikes with over 200,000 contracts of open interest …

This is significantly less market involvement.

While that will change with time, for now, the lack of open interest is likely to reduce the volatility of VIX, and especially VIX futures.

So what does this mean?

It means VIX is going to move less swiftly with the S&P 500 until some activity picks up in August VIX options.

This creates an interesting chance to look at selling call spreads in UVXY or VXX, or even VIX itself for that matter.

I also think that VIX hedges may need some adjusting, because if you think the VIX is going to move as hard as it did on Monday, you are probably wrong.

Your Only Option,

Mark Sebastian

My VIX Play For This Yellow Light

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

Hey Traders,

On Monday morning I switched the Option Pit VIX Traffic Light to yellow.

As promised, today I’m going to tell you what triggered the change.

I’ll also tell you how I would — and am — planning to trade this latest VIX pop.

Before switching the Option Pit VIX Traffic Light to yellow, I had already hinted that it was possible we could see something like this on Friday when I pointed out the CBOE VIX Volatility Index (Ticker: VVIX) move higher.

Welp …

VVIX really blew up this week:

The index was already moving on Friday, and on Monday, it blasted straight up!

That wasn’t the only thing that caused me to flip the light … it was the VVIX in combination with something else …

At the time the S&P 500 (Ticker: SPX) was down about 50, and the VIX was up less than 3 points …

But VIX was already in a partial backwardation — in other words, futures prices are beginning to trade below VIX spot prices …

Right now, the VIX curve looks like this:

As you can see VIX closed well above the July future that settles on Wednesday …

It is flat with August, but still below the rest of the curve …

It’s only a ‘partial’ because all of the backwardation comes from the cash index. The curve itself is actually still in a contango (the futures that are trading higher than the VIX right now).

The other indicators are also flashing yellow.

In addition, we saw some serious VIX trade flow that was bullish yesterday …

The biggest trades were both sizable call spreads:

So what to do?

My answer is a hedged VIX call spread …

I would buy a July VIX call spread, and at the same time, buy an out-of-the-money put.

I think we could see the VIX remain somewhat elevated today, but I think we could 100% turn around as well … after all, that is the nature of a yellow light.

It tells us we’re going to see movement … but it doesn’t tell us in which direction.

I’ve already bought the 23-28 call spread in VIX, and bought the VIX 20-strike puts at the same time, paying a touch over $1.00 for the package.

I like that as a short term play on this action …

Your Only Option,

Mark Sebastian

This Big VIX Trade Could Signal More Upside Ahead

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

Hey Traders,

Today, the Option Pit VIX Traffic Light went from red to yellow at the open.

We’ll be talking about the latest volatility and market movement during our live event tomorrow at 11 a.m. EST (you can access the event by clicking here, and I’ll send you another invite later this evening) …

As well as going over the five trades we gave out last Thursday … 

And who knows, we just may be giving out another trade tomorrow (spoiler alert: we are)

But for now, what you need to know is most yellow lights do not last long, but bring wild swings in volatility.

These swings could be up, they could be down.

The swings are often down, but today we saw a massive trade that is making me think it could be up …

Tomorrow I’ll get into a full breakdown of why the Option Pit VIX Light changed from red to yellow, and what the odds are that it could go green …

But today, I want to point out a giant trade that went up this morning.

Right after the open, a customer bought over 40,000 contracts of the VIX July 50-strike calls for $0.23, and sold the same number of the 65-strike calls at $0.08.

Net, the trader bought the 50-65 strike call spread, expiring on Wednesday morning, for $0.15.

This massive call spread is a sign that this trader is worried about the extreme near future, and is potentially looking for the VIX to blow off its top.

On the day, ALL of the biggest trades in VIX are call buys:

The lone call sale is the July 25’s where a customer was actually closing a winner.

What does all this paper crossing the line mean?

It means that Monday is not the day to fade the VIX, and maybe not Tuesday either.

In the past we have seen these big up days met with MASSIVE put-buying. However, that is not what we’re seeing happen today. 

Instead, everyone is chasing calls.

This means that we have really strong odds for some follow-through from the VIX, at least on the open tomorrow.

I would be cautious, and spend my time trading VIX straddles and strangles, NOT just buying puts to fade the market.

I actually did a trade earlier today for my Volatility Edge program that I will walk through tomorrow, so keep a look out for that, or if you want the details of these trades as soon as they happen, you can become a member here.

Your Only Option,

Mark Sebastian


One Warning Light Flashing Yellow

Hey Traders,

The S&P 500 (Ticker: SPX) tried to scare everyone on Thursday, only to end the day down a measly 15 points.

I think the SPX is probably going to have a nice rebound on Friday …

Of course, I could be wrong, because there is still one indicator saying “look out!”

What am I seeing?

On Thursday the VIX closed at 17.01; not high, but certainly well off the lows from last week.

So where is it headed to next?

VIX curve would say lower, because we are in a nice, steep contango (when futures are trading higher than spot price):

I continue to think (as I stated yesterday) that there is a real risk of the VIX falling apart and ending up with a sub-16 or even sub-15 settle in the next few days.

However … if I am wrong I do have a warning.

Three of my four indicators are saying the VIX is red (the VIX curve, VIX correlation with the S&P 500, and VIX realized vol).

But one is signaling the VIX is in the yellow: CBOE VIX Volatility Index (Ticker: VVIX), the VIX of the VIX.

Check out the price action of VVIX:

VVIX is now over 120 and appears to be heading nearly straight up!

So if it turns out I am wrong, and the VIX actually blows up, this is the warning sign …

Do I think VVIX, one of my secondary VIX Light indicators, is right?

No, I don’t.

But I am not perfect.

Here is the key …

When one of my other indicators is tripped and starts to tell me the VIX is going higher, I know exactly what to do …

But for now I am going to continue leaning short.

Your Only Option,

Mark Sebastian