Going Down: VIX Heads Below 20 — Where to Next?

The Option Pit VIX Light Is RED, and Volatility Is Going to Drop.


Hey Traders,


Well, it happened a little faster than I anticipated …


But the VIX got SMASHED on Monday — and the “gamma squeeze” I wrote about yesterday morning started rolling.


As the VIX began to fall, VIX 24, 23 and 22 puts became bigger delta options as they became more in the money … and market makers were forced to sell VIX futures to hedge.


Throw in an end-of-day S&P 500 Index (SPX) ramp-up and it was the perfect recipe for a VIX dump …


Now the VIX is below 20 again on a Monday night.


A Slow Week Will See the VIX Continue to Fall


Yesterday, we saw a huge amount of trading in March options — specifically options that were NOT in the money late last week that slid to into the money on Monday:



Between the 22s and 20s, almost 200,000 options were traded …


It’s not a stretch to think that was mostly buying. Early in the day on Monday, the 20s were still .10-.15, meaning I could purchase the 20s at .15.


By the end of the day, the price had tripled.


The 20s were an 11 delta (about an 11 percent chance to end up in the money) on Friday and a 40 delta by the close money.


The 21s went from 32 to 70!


The 22s from 55 to 90.


All told, that is a LOT of market maker-forced selling.


So watch out today …


Ahead of VIX expiration on Wednesday, market makers are going to be super-aggressive in covering these open puts using short futures as a hedge.


That type of covering could force the VIX even lower.


There are still over 120,000 open 19s. And a single customer is still open on a massive 100,000-plus buy of the 18 puts purchased for .10 a few weeks back.


My gut says he or she isn’t looking to cover — they’re hoping to hit a home run.


Look, if the VIX breaks 19 today, it may well keep going to 18 — such is the nature of snowballing.


On the other end, if the market goes down today and VIX futures rally, there is a lot of short delta that could disappear.


That would mean we COULD shoot higher, though it’s less likely.


Tuesday Moves


If we are flat to slightly down on the open today, I will be interested in taking a flyer on the 18 puts for .05.


The risk/reward there is really high.


Here’s my plan if conditions are right …


        • Look to buy 50 or 100 18s for .05
        • If they go to .10, sell 55% of my position (that way I can’t lose — including the cost of commission)
        • Let the rest of my position ride for a bit to see how far they go
        • Sell another ½ my position at .25
        • And then let the final 10 or 15 run, selling a few at .50 and the balance at the end of the day, regardless of price.

One of our rules in VIX trading at Option Pit is that we avoid taking positions into expiration.  


Recent Example


Here’s a similar trade I put on last week in our Volatility Edge program that is now paying …


I bought five of the 20 puts for .10 and five of the 50-55 call spreads for .10.


In total, I paid $100.


Towards the end of the day, I sold my first batch of three puts at .40 — which put me in a position where I can’t lose.


My hope is that I can sell the remaining batch at 1.00, or if we get to 18, maybe close to 2.00.


That would mean I turned $100 into about $420 — a 320% gain!


The Option Pit VIX Light Is RED, and Volatility Is Going to Drop.


Your Only Option,

Mark Sebastian

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