Is This A Mellow Yellow?

The Option Pit VIX Light Is Yellow: Volatility Is Going To Move.

Hey Trader, 

Now that the market is right back near all-time highs, I’m sure you were expecting a red light on the VIX traffic light.

Well, we’re not there yet!

Of course, the yellow light certainly hasn’t stopped me from fading vol … I just closed out a tidy 15% win (in under four hours!) yesterday in my Robinhood Trader program … you can see the details here.

However, there are still a few things I am seeing out there that have my light holding onto yellow …

Here’s what’s going on, and how to trade it.

The market is at an all time high …

The VIX is back below 18 …

We should be at a red light on the Option Pit VIX Light, right?


That is not how this thing works!

The VIX is still in a position to potentially make a wild move.

Why? Let’s take a look.

Let’s start with the VIX itself.

The S&P 500 (Ticker: SPX) is just a couple of points off an all-time high …

The VIX though, is still parked at almost 18: 

On Wednesday, July 14th, the VIX closed at 16.30. Currently, it is sitting at 17.69. That’s over 1.25 points higher!

As for the VIX futures curve …

Yes, it’s in a contango (futures trading higher than spot), but the spread between August futures and the VIX cash is a mile wide; a sign that there is still a bunch of fear out there …

The CBOE VIX Volatility Index (Ticker: VVIX) is still at nearly 120:

Collectively, the above factors produce a yellow light.

So what does this mean? Is the VIX going to shoot up to 25 or 30?

Not necessarily. It could make a run over 20, or it could make a dive to 15. A yellow light means we are going to see movement, not a certain pop higher (that’s when we see a green light).

So how am I trading this?

I think puts are pretty cheap in August. Specifically, the 18-strike puts for $0.95 are pretty cheap.

However, I would hedge a trade like that with a call spread of some kind (to take advantage of the NASTY call skew — the difference in volatility between strikes — in VIX).

The 20-30-strike call spread for August only costs about $1.45. That’s not a bad price.

I’ll have a new trade to discuss tomorrow during our Option Pit Live Trading Room. If you were lucky enough to get in on the deal last week, be sure you’re tuning in today.

If you missed it, I’m sorry to say we had to shut that deal down. If you give us a call, though, maybe we can find some wiggle room … (888) 872-3301. Tell them you’re with VIX Edge.

Your Only Option

Mark Sebastian

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