My VIX Play For This Yellow Light

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

Hey Traders,

On Monday morning I switched the Option Pit VIX Traffic Light to yellow.

As promised, today I’m going to tell you what triggered the change.

I’ll also tell you how I would — and am — planning to trade this latest VIX pop.

Before switching the Option Pit VIX Traffic Light to yellow, I had already hinted that it was possible we could see something like this on Friday when I pointed out the CBOE VIX Volatility Index (Ticker: VVIX) move higher.

Welp …

VVIX really blew up this week:

The index was already moving on Friday, and on Monday, it blasted straight up!

That wasn’t the only thing that caused me to flip the light … it was the VVIX in combination with something else …

At the time the S&P 500 (Ticker: SPX) was down about 50, and the VIX was up less than 3 points …

But VIX was already in a partial backwardation — in other words, futures prices are beginning to trade below VIX spot prices …

Right now, the VIX curve looks like this:

As you can see VIX closed well above the July future that settles on Wednesday …

It is flat with August, but still below the rest of the curve …

It’s only a ‘partial’ because all of the backwardation comes from the cash index. The curve itself is actually still in a contango (the futures that are trading higher than the VIX right now).

The other indicators are also flashing yellow.

In addition, we saw some serious VIX trade flow that was bullish yesterday …

The biggest trades were both sizable call spreads:

So what to do?

My answer is a hedged VIX call spread …

I would buy a July VIX call spread, and at the same time, buy an out-of-the-money put.

I think we could see the VIX remain somewhat elevated today, but I think we could 100% turn around as well … after all, that is the nature of a yellow light.

It tells us we’re going to see movement … but it doesn’t tell us in which direction.

I’ve already bought the 23-28 call spread in VIX, and bought the VIX 20-strike puts at the same time, paying a touch over $1.00 for the package.

I like that as a short term play on this action …

Your Only Option,

Mark Sebastian

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