The Option Pit VIX Traffic Light Is Green: Volatility Is Likely To Stay Elevated.

Hey Traders,

We had a reader ask a very good question about one of this week’s posts …

In that post, we talked about some big trades that had crossed in the VIX pits …

That seemed to indicate the VIX could be heading to 50, or even higher.

So the question this reader had was:

“What would be the implication for us if they were thinking much higher?”

This is a great question..

Let’s start with the S&P 500 (Ticker: SPX).

SPX has been in a slow grind lower for more than 2 months:

A clear sign of a bear market.

How does a bear market break?

A real panic, or some sort of serious change in outlook.

Right now I do not see a lot changing outside of the situation in Ukraine …

Thus, since I do not see any big changes, I think we are waiting for the other shoe to drop, so to speak.

Right now we are in an ocean … we know Jaws is there, but we haven’t seen him yet …

Once we see the shark, we are going to get seriously scared …

This will send the SPX plummeting, potentially below 4000.

That is when VIX shoots higher … because right now it is swelling:

With this volatility, we could see a real event that lasts several days or several weeks …

The longer it goes, the more we see the market sell off.

But at a certain point, the VIX will simply stop going up …

Once that happens, we will finally be in a position to break the bear and rally.

So what do you do?

The answer is trade.

By trading this market, we can make money on a daily basis  that more than covers the “nut” we might lose holding stocks..

We can also put on position hedges that will protect our book.

Right now I like hedging directly in SPX or Invesco QQQ Trust (Ticker: QQQ) vs long VIX options.

Although … I like the 35-50 call spread in VIX.

Cash is not an option, because we know inflation is 10%.

So the answer right now is this: take what the market gives you …

Don’t get married to stocks ..

And Trade.

Your Only Option,

Mark Sebastian