Hedging A Bouncing VIX

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


Hey Traders,


The S&P 500 (Ticker: SPX) had a VERY ugly close on Wednesday:



It caused the VIX and the VVIX (the VIX of the VIX) to pop higher, pushing the Option Pit VIX Traffic Light to yellow.


The good news is this creates a ton of opportunities for VIX traders.


Here is what I am going to do about this yellow VIX light …


The VIX is now over 20, and has bounced between backwardation, flat, and contango (futures trading increasingly higher than VIX spot):



As I write this, VIX September futures are trading at a small premium to the cash.


A 22.5-strike VIX future is pretty darn pricey given the small move we have seen.


In addition, VVIX is WAY up …



That said, VVIX is looking a little stretched.


At this point with the light yellow, and both the market and the VIX flopping around, there is a great opportunity to trade hedged call spreads in the VIX.


The VIX September 25-35-strike call spread only costs about $1.30. That will be a nice hedge against a portfolio …


But we all know the speed with which the VIX can drop.


So at the same time I would buy the VIX call spread, I would also buy the VIX September 18-strike puts …


The VIX could EASILY be back to 16 by labor day.  


The 18 puts only cost $0.60. They could more than make up the cost of the call spread if the VIX does recede quickly.


Your Only Option,


Mark Sebastian

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