How To Prepare For More Wild VIX Moves

The Option Pit VIX Traffic Light Is Yellow:  Volatility Will Make Wild Moves …

Hey Traders, 

Remember that a yellow light's “wild moves" can be up and down.

In the case of Wednesday,  the wild move the VIX made was down …

But what a move!

Not only did the VIX get smoked, but VIX futures got destroyed as well.

The January future lost about 1.50 on Wednesday. THAT IS A HUGE MOVE!

The VIX got destroyed on Wednesday. It dropped 2.38 points down to 18.63.

Frankly I could switch my light to red,  meaning the VIX is likely to drop …

But after a giant drop like Wednesday, we could be in for more moves …

Likely to the downside.

Take a look at the shift in the futures curve that took place:

The January future dropped a full 1.50 points.

At the rate this is going, we could legitimately see a 15 VIX early next week.

Because as much as volatility dropped on Wednesday, the entire three-day weekend is NOT priced out yet.

This was more a drop caused by an overpriced VIX.

Now that we are maybe closer to normal for VIX, given the risk, the holiday can start to come out of SPX options, VIX futures, and the VIX options.

And there is more to come, especially in SPX and VIX options …

VVIX, the VIX of VIX, is still SKY high:

At 122, VVIX could see another 10 or 15 point drop.

So how do you play short vol of VIX and short VIX at the same time?

The VIX 19/17 put 1-by-2 costs about $0.35.

In a 1-by-2, I buy one of the 19-strike puts, and sell two of the 17-strike puts.

As the VIX drops and vol drops, the 17s will not pick up the value the pricing model predicts.

As the VIX futures drop, the delta associated with the 19-strike puts more than accounts for the drop in vol.

Next thing you know, the spread is trading $0.70.

It's a little complex and margin heavy for some …

To reduce the margin, you can execute it as a broken wing, and buy the 15-strike puts for less than $1.05, creating a butterfly.

Here is the payout with volatility down 20% and VIX at 16.80:

Your Only Option,

Mark Sebastian

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