How To Play Both Sides of a 15-30 VIX

Hey Traders, 

If you think the volatility is over … it is not. 

Many thought that the market was heading for a turnaround Tuesday …

Then Chairman Powell said to drop the word ‘transitory’…

One sentence, and the S&P 500 (Ticker: SPX) dropped like a stone.

The VIX has had a VERY wild four day ride …

Look at the VIX futures curve over the last four trading days:

What is causing all of this craziness?

A cocktail of Fed tightening, and omicron Covid of course.

What is interesting is that the Fed is talking about tightening as oil is doing this:

United States Oil Fund (Ticker: USO), the oil ETF, has dropped from 38 to below 33 in a little over a week.

That is almost a 20% drop.

If oil is going to stay low, that will take the pressure off the Fed for a bit.

What is also interesting is that the VIX cycle this month is a long one.

VIX expires on December 22nd, the second to last trading day before the holidays begin in earnest.

This is going to put natural pressure on the VIX itself.

In addition, the more we hear about the omicron variant, the less scary it becomes.

The issue is lockdowns. When they happen, markets hate it.

So what does December look like?

I think it could be a rarity.

We could potentially see the VIX hit 30 this week …

Then as volatility pressure subsides, we could also see VIX make a run at a sub-15 number heading into expiration.

I am not sure that has ever happened, but the set-up for December is as such:

The 26-strike calls traded 92,000 times on Tuesday. After that, the next most active contracts are the 18-strike and 20-strike puts respectively.

Traders are playing the fade.

With implied volatility (IV) skew as crazy as it is, the 30-40 call spread only costs $1.20. Pair that with the 18-strike puts for $0.30, and I have a combo to play both sides …

Your Only Option,

Mark Sebastian

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