What This Big VIX Trade Tells Us

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

Hey Traders,


On Thursday the VIX was up and the SPX was up at the same time …


Not usually a good thing.


If this continues, we might switch the Option Pit VIX Traffic Light …


But …


Here is another reason:


On a light day for VIX option trading (only 388k contracts traded), a customer came in and executed this trade:



The customer bought the December 21 straddle paying $5.45.


This is slightly in-the-money, and VIX December futures are about 20, so it leans bearish …


But that is not what is important.


What is important is that this trader only makes money if VIX makes a wild move.


He or she needs the VIX below 16 at expiration, or above 26.


Either way, that would be a big move for the future.


We have seen VIX expirations in the 16’s (like Wednesday) …


Last month, VIX did settle at 15.35 …


But outside of that, there is not a lot that would make a trader hopeful …


Unless VIX is really getting set up to die in December.


Remember the CBOE SKEW Index (Ticker: SKEW) is back to normal, and volatility in the overall S&P 500 is low:



10-day, 20-day, and 30-day day historical volatility (HV) are all below 9.


VIX might be set for a drop …


On the other hand, we could see a pop …


That would be more in line with what many retail traders are looking for.


The basics of this trade is that it is probably a hedge, where the trader is looking to break even or better if the VIX falls …


And clean up if the VIX pops…


Your Only Option,

Mark Sebastian

This Index Says VIX Dies

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

Hey Traders,


The S&P 500 (Ticker: SPX) was down on Wednesday, and the VIX was up.


But we probably are not due for a huge sell off …


In fact, I think we will start a rally over the next few weeks.


We have entered a new volatility regime.


Where 20 used to be low, it is now high…


While VIX has yet to break 15 on a close, it is coming …


How do I know?


The CBOE SKEW Index (Ticker: SKEW).


The SKEW index continues to flounder:



The SKEW index, you’ll remember, is the cost of out-of-the-money puts relative to at-the-money options.


Even with this small sell off, the index has not caught legs …


Why?


Hedging hasn’t worked.


Money managers are fickle.


They are as close to retail traders as possible, in terms of patience … maybe worse …


They see a shiny object and go after it.


Right now, money managers that tried to hedge are thinking about how they have been getting killed …


They aren’t hedging …


They may be doing some short-dated SPX put-buying, but that is about it …


And when SPX runs hot, they are more concerned about chasing the index than hedging.


So what does this mean?


When the SPX starts to rally again, expect VIX to die.


In Volatility Edge, we are playing this game, looking for the VIX to drop.


There are options in VIX that are getting entirely too cheap.


There is a ton of opportunity in December.


But you’ll have to join me to find out where.


Your Only Option,

Mark Sebastian

This VIX Trade Sends A Message

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

Hey Traders,


The VIX ended the day down, and while I do not think those 15-strike puts I own will end up in the money …


There is a chance!


That being said, the biggest option trade of the day on Tuesday was a really smart trade in VIX.


Let me tell you what they did …


So, while the VIX ended the day slightly down …


VIX futures were mostly flat.


So what is going on?


Well, we do have VIX options expiration on Wednesday (today!) which could hold things up …


But given what has happened the last few days, I am sure the trading crowd is back to wondering if the wall (of worry) we are climbing is coming to an end.


My gut says no …


And the confirmation comes from a surprising place: a giant VIX trade.


Check out this trade:



A customer bought 57,000 of the VIX 17/50 strangles in February, paying $1.70…


Why would she or he do that?


Let’s talk about the P&L.


For this trade to make money, one of two things need to happen…


The VIX needs to settle below 15.30 …


OR …


VIX needs to pop.


If the trader really thought VIX was going to blow higher he or she would have bought the 20, 25, or 30 calls.


Instead they bought the 50s.


At the same time, they bought a put that is already in the money relative to the cash index.


This trader is really looking for a drop.


They think they can sell those 17-strike puts for a win, and then sit on the 50 calls.


I know it seems counter-intuitive …


But I would bank this trade, as I am looking for VIX to go to 14 between now and December.


I continue to look at the December puts (notice I didn’t give you the strike … if you want that, you need to be a Volatility Edge member) as a value.


Your Only Option,


Mark Sebastian

2 Pre-Expiration Vol Trades To Make

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

Hey Traders,


Well, despite the VIX being up on Monday (weekend effect) …


VIX futures got sold.


As we head into expiration, the November future is trading at a full point premium to the cash …


Heading into two days where the VIX is statistically likely to drop.


So, heading into Wednesday, what are some potentially profitable expiration trades?


The VIX closed up 0.20 on Monday. When taking the weekend effect into account, we can call it essentially down …


How do I know? VIX futures.


While the VIX did close higher, VIX futures were down on Monday.


The November future is trading at a 1.01 premium to the index (really wide) …


December is trading at almost 4 points:



So how do we play it?


The easiest two trades come from November.


Take a look at this option chain for puts:



Let’s start with the November 17-strike puts.


They closed out $0.45-$0.50 (I mentioned in my Vol Edge live I thought they were a good buy when they were $0.25 Monday morning)…


The good news is they are probably a good purchase here.


They are 100% in the money vs the cash VIX, trading at parity …


This means if the VIX sits, they break even …


If the VIX drops, they win …


If the VIX rallies, they can lose …


It’s a coin flip, except we know that the VIX is more likely to sit or drop on a Tuesday than it is to run higher.


This is a trade I would look at strongly.


The other is the 16-strike puts.   


At $0.10 they are cheap, and if you think VIX can’t get to 15, take a gander at the drop from the 2nd to the 3rd of November in VIX:



These are a really inexpensive play on VIX getting smoked … the type that can pay out four-to-one (or more!) if VIX selling gets a head of steam.


Interestingly, I see even greater opportunities in December …


Where?


You know what you need to do …


Join me in Volatility Edge.


Your Only Option,


Mark Sebastian

Volatility In This Sector Is Exploding

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

Hey Traders,

While the VIX itself seems to be cooling off, and potentially heading toward 15 again …

There is a sector of volatility that is exploding.

The opportunity to make money trading this area of the market is potentially huge.

Commodity and materials implied volatility (IV) is up …

But no area of the financial markets has seen the same kind of under-the-radar pop as bonds.

CBOE 20+ Year Treasury Bond ETF Volatility Index (Ticker: VXTLT) is the VIX of iShares 20+ Year Treasury Bond ETF (Ticker: TLT). 

Check out the move it has made:

VXTLT touched over 20 on Monday, and is currently at 18.65.

That would put it about 2 points higher than the VIX index itself.

That is right; a basket of US bonds has a higher implied volatility than the S&P 500 (Ticker: SPX)!

Why?

Well if you have listened to the discussions I have had with Bill Griffo over the last couple of days you probably know …

The Fed is trapped.

Inflation is not going away.

And who knows where interest rates might go …

Yes the Fed is likely to keep the Fed Funds rate low …

But as they taper bond buying, they will  have less control on the direction of the actual bond market.

This is the first time we could see bonds somewhat free to roam in about two years.

The bond market is saying “look out!”

When will this bleed into the VIX?

Probably not until next year … but it will.

Your Only Option,

Mark Sebastian

Are These VIX Options Too Cheap?

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

Hey Traders,


Today the S&P 500 (Ticker: SPX) managed to gain 2 points on Thursday.


The VIX on the other hand …


Got smoked.


The VIX was off 1.07 back down to 17.83:



VIX futures also felt some pain, although I would note they closed well off their lows.


So what does this mean?


Is the selling over, or is this a temporary breather?


The VIX is still way off the recent lows.


I think the key is the price action on Friday.


If we see a nice rally in the S&P 500, and we see the VIX drop, we are probably in the clear.


If we see more of what we saw Thursday …


I am not so sure.


If the market rallies and VIX rallies, there is no WAY this is over.


That being said, the short vol side of trading has gotten really cheap.


With the VIX at 17.83, the 16-strike puts are now $0.05.


These puts were $0.60 on November 4.


While they will probably end up out-of-the-money …


The 15, 16, and 17-strike puts are still all probably way too cheap.


I would be a buyer.


Your Only Option,


Mark Sebastian

Should You Go Long Vol?

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

Hey Traders,


The VIX has had a nice run since bottoming out on November 3rd.


But that said, it does not mean that you would have made money being long volatility.


It is really hard to make money owning VIX or VIX ETP options like ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) or  iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX).


That said, you can make money trading long, but it’s not the way you think …


The VIX hit its bottom on October 21st.


It traded below 15, and closed at 15.01.


If you said to yourself, “this has to be the bottom for volatility, I am going long,” how do you think you did?


Below is a chart of VXX (top) and the VIX (bottom):


Well the VIX did rally …


Over the course of a couple of days it rallied from 15 to 17.


But look at VXX; it went nowhere!


In fact, if you bought VXX on the low tick, and sold today, you would be losing money!


So how does one go long volatility?


In a market like this, it makes sense to short-term day trade.


But to truly go long volatility, the Option Pit VIX Traffic Light should at least go yellow.


But we have not had a yellow light this entire time!


Remember, the yellow light usually means that the VIX futures curve has flattened up.


Something like we saw in mid-September:



Even then, you cannot rest on your laurels.


One must trade short-term, take profits and roll higher to stay long …


It’s the only way, short of a March 2020 event.


Then, there would no longer be a drag on VXX or UVXY.


That has not happened this entire time.


Thus, I am looking to stay flat-to-short until the curve actually moves.


Your Only Option,


Mark Sebastian

Should You Be Long Vol Right Now?


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

Hey Traders,


The VIX has had a nice run since bottoming out on November 3rd.


But that said, it does not mean that you would have made money being long volatility.


It is really hard to make money owning VIX or VIX ETP options like ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) or  iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX).


That said, you can make money trading long, but it’s not the way you think …


The VIX hit its bottom on October 21st.


It traded below 15, and closed at 15.01.


If you said to yourself, “this has to be the bottom for volatility, I am going long,” how do you think you did?


Below is a chart of VXX (top) and the VIX (bottom):


Well the VIX did rally …


Over the course of a couple of days it rallied from 15 to 17.


But look at VXX; it went nowhere!


In fact, if you bought VXX on the low tick, and sold today, you would be losing money!


So how does one go long volatility?


In a market like this, it makes sense to short-term day trade.


But to truly go long volatility, the Option Pit VIX Traffic Light should at least go yellow.


But we have not had a yellow light this entire time!


Remember, the yellow light usually means that the VIX futures curve has flattened up.


Something like we saw in mid-September:



Even then, you cannot rest on your laurels.


One must trade short-term, take profits and roll higher to stay long …


It’s the only way, short of a March 2020 event.


Then, there would no longer be a drag on VXX or UVXY.


That has not happened this entire time.


Thus, I am looking to stay flat-to-short until the curve actually moves.


Your Only Option,


Mark Sebastian

This VIX Trade Could Double

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

Hey Traders,


Leading into Wednesday, the VIX was up four days in a row.


How long can it last?


Is this leading to THE sell off?


The VIX touched into the 18’s on Tuesday …


The S&P 500 (Ticker: SPX) is down again on Wednesday …


But so is the VIX.


Why?


It’s the CBOE SKEW Index (Ticker: SKEW), which indicates IV (and demand) for crash-protection puts in the SPX.


After blowing higher over the last week, the SKEW Index is starting to fall again:



SKEW is falling because traders are unloading protection.


It appears that the rally in the VIX might be somewhat short lived:



If this is the peak in the VIX, heading into expiration next week, we might see volatility really fall off.


I am a $0.05 or $0.10 buyer of the VIX 15 puts; I think they could double.


Your Only Option,

Mark Sebastian

Look At These Big Trades In VIX Today

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

Hey Traders,


The Option PIT VIX Traffic Light is still red …


Even with the VIX rising for its fourth day in a row.


Now, we could attribute this to expiration next week.


It wouldn’t be the first time we’ve seen the VIX rise in anticipation of expiration …


In the pits, VIX was getting hit by very heavy trading volume today.


So what did we see cross the tape today in the VIX pits?


For starters, VIX pits saw 125% of their average daily volume …


That’s a pretty significant amount of extra attention traders are giving to VIX right now.


Here is a snapshot of the largest VIX trades that went up:



I specifically want to mention that there is a LOT of buying volume today.


A LOT of it was at relatively near-the-money strikes, too …


Suggesting traders might be hedging “for real” by buying “meaty” options that are more likely to end up in-the-money …


As opposed to just hedging with cheap, far-out-of-the-money baby options that basically for a catastrophe …


Look at the huge trade that went up at 12:17 p.m. EST …


This trader bought 22,000 of the December 20-strike calls at the same time as 15,250 contracts of the December 21-strike calls, and 13,420 contracts of the December 21-strike puts …


That isn’t all.


At the same time, the trader bought 15,000 contracts of the February 27-strike calls, 10,560 contracts of the February 2022 23-strike calls, and 12,000 contracts of the 23-strike puts.


Overall, of the top five strikes that saw the biggest volume, FOUR were calls.


And seven of the top 10 biggest volume strikes were calls …


That is significant.


Someone is putting down A LOT of money on calls …


That is enough to keep me interested.


The VIX Light remains red …


But for how long?


Your Only Option,

Mark Sebastian