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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