My Take On The Impending Vol Swell

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

Hey Traders,

When I tell people we are due for a VIX pop, they typically have two questions.

The first one is:

“How long will it last?”

The other I get is:

“How high could the VIX go?”

I think I have your answers…

Yesterday’s post on the upcoming VIX pop might seem a little ominous…

Frankly, it should.

The market is heading for what appears to be some sort of VIX swell.

The question, though, is how strong of a swell are we talking?

A mini-swell might bring us a 30 VIX. The key word there is “might.”

A serious swell would still be smaller than the one last year (seriously, one like last year only happens about once every decade), but could still bring us near 40 on the VIX.

A mini-swell may only be a few weeks.

But a major jolt can take months.

Based on the trading action, even as the VIX was getting bids, smart money seems to think a VIX pop will be somewhat short lived.

While yesterday was not the busiest day for VIX, I did take note of the most active strike:

The September 15-strike puts traded hands almost 50,000 times for $0.10, almost all buys were opening, and not small in size.

A “size trader” has an axe to grind here.

There is some serious open interest on the August 20-strike calls, and the 30-35-strike calls.

There is also some sizable open interest (over 220,000) on the September 25-strike calls.

I think that sets your upper limit at around 30-35 for any VIX pop.

With all the trading action today on these September 15-strike puts, I would put my money down on things being played out by Labor Day.

The September 15-strike and August 16-strike puts are both $0.10, and I think they are really interesting cheap plays on a VIX regression, which is something that can be paired with long VIX hedges.

We could make a play like that in my Volatility Edge program.

But what could be a catalyst that sends us south?

Frank and Andrew are going live to talk about that at 11 a.m. EST today … click here to attend and hear what they’re watching (and trading).

Your Only Option,

Mark Sebastian

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