The Option Pit VIX Traffic Light Is Green: Volatility Is Likely To Stay Elevated.

Hey Traders,

The S&P 500 (Ticker: SPX) closed Monday at its lowest level since June 18, 2021.

But this market is very different from the June 18th market …

As you can see, in 2021 that level was a chance to ‘buy the dip’:

Markets went almost straight up through August from that low…

This lead to a VIX that entered the teens, and basically stayed between 16 and 20 for the next three months.

This time around, though?

It feels pretty different.

There is no more ‘buy the dip,’ there is only selling right now.

So what to do? Should you liquidate assets?

The answer is NO!

However, I would be hedging here.

There is a real chance of the VIX going to 50 or 60 at this point.

That is not that far off, we closed 36.45 on Monday.

The March future settled at a contract high, and we also happen to have a VERY steep backwardation on our hands:

Oil is exploding, wheat is exploding, corn and soy are next …

Then maybe we get a blow-off-the-top in gold.

The key right now is to have long volatility positions.

The main ways to do this are to buy puts in the S&P 500 (right now I would be buying a put spread).

The second way is to buy calls in the VIX.

Today we bought the VIX 40-50-60 call fly expiring in March.

Remember, March VIX future only has five trading days left. It is going to move VERY closely with the VIX index over the next five days.

This means that if the VIX goes to 50, the VIX futures are going to break 45 easily …

At this point, without a conclusion in Ukraine and all the economic events coming up …

I think a sub-4000 S&P 500 is borderline certain.

Thus, as I stated … it is time to put on some long volatility.

In addition, remember, active trading is the best way to combat market volatility.

Your Only Option,

Mark Sebastian