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