The Option Pit VIX Traffic Light Is Green: Volatility Can Go Up.

Hey Traders,

Through the close on Thursday, the market continued to be unable to find its footing. The S&P 500 (Ticker: SPX) failed for three days in a row to hold a rally …

Is the VIX going to 40?

It’s possible …

But I am continuing to see ‘red shoots’ for VIX in the way it is trading.

The VIX appears to have stalled out for the time being …

Over the last three days, in spite of the SPX’s wild swings, the VIX has been floundering:

While a VIX over 30 is nothing to ignore, the fact that it is holding in place may be a sign that we might be reaching selling exhaustion.

It doesn’t mean there won’t be another leg higher, but we could be due for the index to back off.

Another major sign the VIX is getting tired? The futures.

The futures curve has dropped for three days straight:

While we are still in backwardation, the steepness has declined significantly, especially at the front end of the curve.

Also, VVIX – the VIX of VIX – dropped again:

Most importantly though, SPX and VIX were both down on Thursday…

If we see a day where the SPX is up and VIX gets crushed, or SPX is flat (or down) and VIX drops, that could confirm we are near a bottom for SPX.

So what is a trader to do?

We flip our hedge trade with a put around.

I would look to buy the Feb. 22-strike puts (options that have been EXTREMELY active over the last few days) …

And pair those with a call spread in VIX buying the Feb 30-40 call spread for $1.80, on a ratio of about three puts to one call.

This is a trade like one we will likely be executing in Volatility Edge …

Your Only Option,

Mark Sebastian