Traders Are Nervous … Or Are They?

The Option Pit VIX Traffic Light Is Yellow: Volatility Is Going To Make Wild Moves.

Hey Traders,

As we head into the FOMC meeting and press conference on Wednesday, there sure is a lot of fear in the market …

Or is there?

While VIX is over 20, some of the action traded Tuesday speaks volumes (get it?) about what might occur in the next few days.

For a short period of time, the market looked like it was going to fall apart on Tuesday.

The Nasdaq 100 (Ticker: NDX) was down over 2%.

The S&P 500 (Ticker: SPX) was down over 1% …

The Dow Jones Industrial Average (Ticker: DJI) was the only index that didn’t look completely sick.

Which is why I was surprised when I saw the option volume for VIX options expiring a week from Wednesday (the 22nd).

Check out the trading:

There was almost NO call buying for December expiration!

The 25-strike calls did less than 30,000 contracts, and the 30-strike calls barely did 20,000.

Meanwhile, the December 21-strike,  20-strike, 19-strike, and 18-strike puts were all very active…

On a day the S&P 500 was down over 60 points, puts outpaced calls 1 to 1.2!

This is unusual, and shows traders are setting up to fade the Fed, at least in volatility terms.

The 18-strike puts traded almost 80,000 contracts. They are going to cost about $0.25.

I think that is a good value …

Your Only Option,

Mark Sebastian

Up Or Down, Which Is It?!

Friday morning is quadruple witching.

We typically expect some wild moves the week of expiration, especially with the Federal Open Market Committee (FOMC) meeting coming on Wednesday …

But the truth is, we can get more information about what is going to happen from the VIX paired with the SPX than either index by itself.

Here is a two-day tick chart of the SPX over the VIX:

On Friday, the VIX closed at its lows, and the SPX at its highs.

On Monday, the same did not happen…

We saw the SPX close on the lows, but the VIX itself was well off its highs…


A couple of reasons.

For starters, we have seasonality hitting us in the face right now.

VIX is going to have trouble getting a bid with Christmas just 12 days away.

But I think the greater reason is that traders were not really selling this sell-off.

Yes Apple (Ticker: AAPL) aapl got soft…

But interestingly the Russell 2000 (Ticker: RUT) and ARK Innovation ETF (Ticker: ARKK) both closed WELL off their lows.

We could be at the beginning of a small risk-on rotation out of the mega-caps, and into some of the small caps.

Heck, if not for AMC Entertainment (Ticker: AMC) and GameStop (Ticker: GME) it is entirely possible the Russell 2000 could have maybe got some legs at the end of the day …

But it didn’t.

So the question is … who is right?

Friday or Monday?

Based on the lower VIX I would say Friday. Remember, we also had some Weekend Effect hitting the VIX on Monday …

The real increase in VIX was less than a point, adjusted for the weekend …

This makes me think any pop in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) is a fade…

Right now UVXY is losing about $0.16 a day theoretically in decay …

That is $0.64 in four days. If the VIX falls back toward 19 or lower, UVXY will be below 14 …

The 15-strike puts cost $0.75, not a bad calculated risk.

Your Only Option,

Mark Sebastian

What’s Next After Last Week’s Astounding VIX Move?

The Option Pit VIX Traffic Light Is Yellow: Volatility Is Going To Make Wild Moves.

Hey Traders,

Last week we saw the VIX go from over 31 to under 19.

That is just an astounding move!

On Monday, the VIX seems to be recovering some of that drop as the S&P 500 is selling off …

As we head into Quadruple Witching and VIX expiration, where are things heading?

The VIX had one of the wildest ranges I have ever seen last week:

Friday to Friday, we saw a high in the VIX over 35, and the low close was below 19!

That is just an incredible move, something I am not sure I have ever seen.

The VIX curve made similar moves, but stands in contango:

We have a lot of noise this week..

We do have the FOMC meeting … which could cause fireworks.

But quadruple-witching could be just as interesting.

Remember, these December options in S&P 500 (Ticker: SPX) have been around for several years.

There is a LOT of rolling that needs to be done by traders out of December futures and into March.

This rolling action can cause huge liquidy disruptions, and cause markets to make some nasty moves up and down.

After last week's short squeeze, we are seeing a predictable move higher in VIX.

But will it last?

Monday is going to set the tone for the week after we closed at an all-time high. Can the VIX get legs under it?

Continue to keep an eye on the Russell 2000 (Ticker: RUT). While the S&P 500 was at an all time high on Friday,  RUT was down.

The top stocks are performing,  but the pile-in could end quickly…

If the money does not flow into the SPDR Dow Jones Industrial Average ETF (Ticker: DIA) and iShares Russell 2000 ETF (Ticker: IWM), we could be in for a rough week.

My lean is still short volatility. VIX is too high, but it might not matter if RUT can’t get a lift.

Your Only Option

Mark Sebastian

The VIX Is Getting Smoked … Here’s How To Trade It.

The Option Pit VIX Traffic Light Is Yellow: Volatility Is Going To Make Wild Moves.

Hey Traders,

While the S&P 500 moved a modest 14 points on Wednesday, the VIX got completely smoked.

The VIX closed at 19.96.

At Monday’s open, it was over 30.

That means it dropped 10 points in about two trading days.

The move in VIX futures has been just as astounding.

Check out the action of the last four trading days:

From backwardation to a pretty steep contango is impressive.

How about my idea from Wednesday’s post?

You COULD have bought the 19 puts for $0.45 on the open …

Heck they were trading there most of the morning.

Where did they close?

$0.85,  almost a 100% gain in a day.

But the fun is not over yet.

I think there is way more downside here based on the action.

It appears ARK Innovation ETF (Ticker: ARKK) is NOT going to implode.

The December lull is coming …

Believe it or not,  we could see a year-low close within a few trading days of a VIX of 30 …

The 17-strike puts are near $0.20.

Here is a price chart over the last month of the 17-strike puts:

These were over $1.00 for a while.

If VIX tanks, they may get there again…

We put on a trade here on Wednesday in Volatility Edge

I expect the trade to make 300%.

The crazy thing?

I might have an even better trade in ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) I am going to execute soon …

Only one way to find out!

Your Only Option,

Mark Sebastian

Is The VIX Really Ready To Take A Break?

The Option Pit VIX Traffic Light Is Yellow: Volatility Is Going To Make Wild Moves.

Hey Traders,

The VIX light is now yellow. Does that mean the craziness is over?

Well, it means that the likelihood of the VIX going to 60 is a lot less than it was on Friday …

But is the VIX going to truly calm down and head to the 15-17 range?

Well,  the VIX Light switched from green to yellow mostly because the curve flipped back into a nice contango (futures trading progressively higher):

That said, the December future and VIX cash are still right on top of each other.

This means that the VIX could still pop …

But …

More than likely, it is going to fall…

If the VIX falls to 17, the December future could break 20.

If that is the case, there is still a lot of value in VIX puts.

And traders have definitely been noticing.

Check out the VIX put volume on Tuesday:

In unusual trading the 18-strike, 19-strike, and 20-strike puts all traded over 100,000 contracts,   and these were mostly buyers.

Personally, I see value on the 19 puts.

If VIX just calms back down into the low 17s, those will balloon to over $1.00.

I would be a buyer …

With a hedge (but the only way to get that trade is to be a member of Volatility Edge).

Your Only Option,

Mark Sebastian

How To Trade The ARKK Uncertainty

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

Hey Traders,

So Monday was nice. The Dow Jones Industrial Average (Ticker: DJI) ran up 650 points, the S&P 500 (Ticker: SPX) gained over 50, the Russell 2000 (Ticker: RUT) blew higher by 47 points for a cool 2.2% gain.

The Nasdaq 100 (Ticker: NDX)? 

A paltry 0.85% gain.

The VIX took it on the chin on Monday…

Not a haymaker, but a good punch to the chin.

Take a look at the movement in the VIX futures curve.

In one day it went from a strong backwardation form back into contango:

This is because ARK Innovation ETF (Ticker: ARKK) and its holdings have been at the root cause of this volatility event.

ARKK, which holds many of the most highly volatile names in the NDX, up until today had been in a free fall:

Names like Tesla (Ticker: TSLA), Zoom (Ticker: ZM), Teladoc (Ticker: TDOC), Palantir Technologies (Ticker: PLTR), DraftKings (Ticker: DKNG) all show the same pattern of pain.

Because of ARKK.

It was in a bit of a  feedback loop …

ARKK holdings drop, investors redeem, ARKK must sell its holdings to pay investors, and its holdings drop more.

It’s a nasty cycle and has been the driver of a lot of the market volatility we’ve been seeing.

If you pay attention to ARKK, you know where the market is going.

So what now for VIX?

It appears the true blood letting MIGHT be over.

If it is, VIX is going to drop like a stone below 20.

However, an end to ARKK pain is not an assured thing.

There is the off chance that the fund implodes …

So what do I do as a trader?

Buy puts in ARKK, buy puts in VIX as a pair.

That is going to PAY.

Your Only Option,

Mark Sebastian

Why Today’s Rally Doesn’t Mean We Are Out Of The Woods

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

Hey Traders,

The market is in full backwardation, with VIX futures trading progressively lower …

Sometimes this represents a bottom for the market.

But there are times where it can represent a serious weakness in the market.

So the question is: will VIX stay high, or dip back below 20?

The VIX closed on Friday over 30, and the Futures are now in full backwardation:

This is in spite of Monday’s rally …

Frankly, the rally on Monday is not “all there.”

While the Dow Jones Industrial Average (Ticker: DJI) is up nearly 2%, the Nasdaq 100 (Ticker: NDX) is flat.

This again represents money moving to quality.

This type of behavior usually does not signal there is an end in sight …

While I think the action on Friday was certainly full of panic, especially in VIX …

The overall shape of the curve says we could be here for a bit.

At the end of the day on Friday, a customer put THIS trade up:

The trader sold the January 19-17 put spread collecting $0.40.

Here or she then bought the January 60-70 call spread for $0.48.

Net he or she paid $0.08 to be long the VIX above 60, and up to 70.

This trade is almost certainly a hedge …

It is probably against a big equity or credit portfolio …

The fact that they are stepping in to hedge could be viewed as bullish because they are hedging instead of just selling …

The fact that they used the 60-70 call spread to create this exposure is curious …

Keep an eye out, because Tuesday will be telling.

In the meantime, hedged short bets in December still look interesting.

Your Only Option,

Mark Sebastian 

How Long Will This Crazy Vol Last?

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

Hey Traders, 

The Option Pit VIX Traffic Light is green … but for how long?

Thursday saw some crazy trading action.

On a day that Apple (Ticker: AAPL) could not get off the mat and the Invesco QQQ Trust (Ticker: QQQ) was only mildly positive, the Russell 2000 (Ticker: RUT) and the Dow Jones Industrial Average (Ticker: DJI) both had huge days.

So now the question is … how long will vol stay high?

Win Some, Lose Some

On Thursday, the Dow Jones Industrial Average and the Russell 2000 took off.

The QQQ? Not so much. 

The Nasdaq 100 (Ticker: NDX) was also pretty lethargic most of the day.

This is directly related to the mega caps being overbought (notably AAPL), and some issues going on at ARK Innovation ETF (Ticker: ARKK) funds.

ARKK appears to be in redemption hell, which is why its major holdings cannot get off the ground.

But even so, the S&P 500 (Ticker: SPX) managed to close up about 1.5%, and the CBOE Volatility Index (Ticker: VIX) closed lower … albeit still sky high.

However, traders seem to think the omicron scare is close to running its course.

How do I know?

Check out December put volumes in VIX:

Over 100k of the December 22-strike puts traded, mostly bought.

These are traders setting up for the fade.

If we see a VIX below 20, those puppies are nice winners.

So what is a trader to do?

With the Option Pit VIX Traffic Light still green, I am not all about getting massively short volatility …

But a hedged short position makes sense at this point.

And let’s talk about ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY).

If the VIX is lower on Friday, UVXY could get crushed.

Yet, take a look at the UVXY options expiring on Friday:

At about $0.65 the Dec. 3 20-strike puts are entirely too cheap, given how much UVXY can drop in a single day.

If VIX goes to 24 on Friday, UVXY will approach breaking 18.

Your Only Option,

Mark Sebastian

Futures Aren’t Buying This VIX

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

Hey Traders,

The VIX touched over 32 on Wednesday …

Does it make sense now why the Option Pit VIX Traffic Light has stayed green even as the VIX has made its temporary drops?

It is hard to believe that just over one week ago we were watching a VIX in the 18’s, and thinking that might be a touch high …

But that’s the nature of the market … and the nature of VIX.

However … while volatility spikes like we are seeing now may not be unheard of …

I am seeing something that I have never seen before …

Check out this VIX futures curve:

While the VIX curve is backward to cash, the curve itself is flat … not backwards.

I have never seen the VIX move from 17 to 30 without the curve going full backward.

This tells me a few things …

This type of curve is not very stable. That is maybe not so surprising after the big moves we have seen in the VIX curve over the last several days …

It also tells me that VIX futures are not fully buying into this continued selling.

If they were, we would be seeing a different curve.

I think going forward, we could see the S&P 500 (Ticker: SPX) and Dow Jones Industrial Average (Ticker: DJI) roar higher …

That might help calm the VIX …

But like I said last week, I still think we could see weakness out of the Nasdaq-100 (Ticker: NDX), so proceed with caution …

Your Only Option,

Mark Sebastian

How To Play Both Sides of a 15-30 VIX

Hey Traders, 

If you think the volatility is over … it is not. 

Many thought that the market was heading for a turnaround Tuesday …

Then Chairman Powell said to drop the word ‘transitory’…

One sentence, and the S&P 500 (Ticker: SPX) dropped like a stone.

The VIX has had a VERY wild four day ride …

Look at the VIX futures curve over the last four trading days:

What is causing all of this craziness?

A cocktail of Fed tightening, and omicron Covid of course.

What is interesting is that the Fed is talking about tightening as oil is doing this:

United States Oil Fund (Ticker: USO), the oil ETF, has dropped from 38 to below 33 in a little over a week.

That is almost a 20% drop.

If oil is going to stay low, that will take the pressure off the Fed for a bit.

What is also interesting is that the VIX cycle this month is a long one.

VIX expires on December 22nd, the second to last trading day before the holidays begin in earnest.

This is going to put natural pressure on the VIX itself.

In addition, the more we hear about the omicron variant, the less scary it becomes.

The issue is lockdowns. When they happen, markets hate it.

So what does December look like?

I think it could be a rarity.

We could potentially see the VIX hit 30 this week …

Then as volatility pressure subsides, we could also see VIX make a run at a sub-15 number heading into expiration.

I am not sure that has ever happened, but the set-up for December is as such:

The 26-strike calls traded 92,000 times on Tuesday. After that, the next most active contracts are the 18-strike and 20-strike puts respectively.

Traders are playing the fade.

With implied volatility (IV) skew as crazy as it is, the 30-40 call spread only costs $1.20. Pair that with the 18-strike puts for $0.30, and I have a combo to play both sides …

Your Only Option,

Mark Sebastian