More upside

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Hey Traders,

As you may know, I hosted a live trading event yesterday.

Attendees were able to watch me trade for 90 minutes, from the opening bell on.

And I covered a lot.

Observing a professional trader in the live environment is beneficial for anyone interested in trading options and we’ll have some highlights available in the coming days …

Anyway, I walked through the Option Pit VIX Light and how I use my Robinhood Trader proprietary retail scanner.

I also put on a great trade in the iShares Russell 2000 ETF (Ticker: IWM).

How did I spot it? 

Hint: It involves the VIX.


I track all the volatility indexes.

I look at VIX (obviously), VXN (the Nasdaq-100 VIX), and RVX (the VIX for the Russell 200 Index).

Yesterday, I honed in on RVX …

Here’s something to note: indexes on their own are not really that valuable — all they say is how expensive options are.

But, when we watch the movement with the underlying index — like the S&P 500 Index vs VIX — I get a ton of value.

Another way I get value is by comparing volatility indexes …

They all tend to move together.

So, when one index really outperforms or underperforms another, that is incredibly valuable information to me.

RVX, for instance, normally trades 4-6 points higher than VIX.

Take a look at this chart tracking the spread of RVX vs VIX. Yesterday, it went above 13 …

Not since the mess a year ago have we seen spreads like this …

And this market is NOTHING like that market. In fact, we are in a bull market now.

But …

The RUT at the lows yesterday was 11% off the highs, while the SPX was down only a few percentage points.

That stretched the spread to over 13 yesterday morning! Now, as the day ran on and RUT rallied, it closed below 13.

And I used this to call a rally in RUT and IWM (the ETF that tracks RUT).

The spread is slowing and will soon begin moving back toward the mean, and to make that happen the VIX needs to explode, or the RVX implodes.

Given the shape of VIX futures (in a nice contango, with the future price higher than the spot price), it is almost certainly the latter.

So, I knew (and know) I want to be long IWM (RUT).

With implied volatility so high (over 32) as a result of the RUT dropping like a stone in one week, yesterday, I set up a long butterfly (that’s long 1 call, then short 2 calls further out of the money,  and long 1 even further out of the money).

I paid 1.80 for the 212.5-220-227.5 call fly expiring April 1. The risk graph below helps you visualize the position.

I make the most with the passage of time and a move to 220 — preferably with a drop in IV — because of the trade setup …

It is short vega and long theta, while producing a long delta (see the Greeks in the chart above).

What’s that? Don’t know the Greeks? Stop reading this immediately and call Ted, our Head of Customer Care, at 1-888-872-3301 to remedy this situation.

Looking Great

At any rate, the spread closed worth 2.35 — a nice gain of .55 in a day per spread (almost 30%).

And there is more good news …

The spread is still really wide, which means IWM has more to go.

I like setting up bull flies (with IV this high it is the best bull play).

Later today in our Option Pit Market Show (exclusive to our Trading Legion students and OP Pro members), I am going to walk through another bull fly (and probably close this one).

The Option Pit VIX Light Is Red, and Volatility Is Likely to Drop.

Your Only Option,

Mark Sebastian

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