Hey, Traders.

With a decent market rally move of the day Thursday, the VIX had a precarious drop.

Even with the end of day rally, the VIX finished down 7 points …

And the drop pulled down the entire VIX curve with it.

As you can see below, the VIX futures went from a full backwardation (trading higher than the spot price) to a partial contango (trading lower than the spot price):

The VIX is trading below the first three months, and more importantly, February is trading at a discount to March.

While from March on the curve is backward, the above image does NOT mean that VIX is definitely going higher.

It means that the VIX could go higher — or lower …

But it IS going to move.

I expect over the next few days we are going to see wild moves in the VIX.

In fact, we may see another trip over 35 on Friday or Monday …

And I think we DEFINITELY see a trip below 25 in the next week too.

The War Must Stop

Markets need the Robinhood/Reddit situation to resolve itself. 

Once that happens, it’s probably ‘night-night time’ for the VIX index …

Especially considering we finish up the “mega-cap” earnings reports by Groundhog Day (next Tuesday).

This type of situation calls for using the VIX as a momentum trade.

That means we’re short dated calls in VXX when the VIX is rallying and short dated puts in VXX when the VIX is fading.

My ‘big’ position will be long the market … and long a hedge via cheap long puts and potentially some sort of long VXX call spread with a long put.

Yes, it’s a touch complex,  

We walk through managing this type of exposure in our Trading Legion service through small and group mentoring.

I do not mind owning calls in VXX here because there is almost no “roll yield decay,” which is the cost of rolling futures back to maintain the target of a 30 day future).  

A long VXX iron butterfly is long a straddle and short a strangle …

The spread below costs $2 and makes money if VXX runs back over 20 (it might) or drops to 17 by next week (which, it also might).

In fact, it might win twice before all is said and done. Check it out:

Here is the risk:

This is the type of play we preach at Option Pit in these types of volatility environments … because we’re not betting on the direction of volatility … just the movement.

The VIX Light is Yellow.

Your Only Option,

Mark Sebasitan