Playing Both Sides

The VIX Light is Yellow:  Volatility Will Swing Wildly.

Hey Traders,

We continue to see huge swings in both the S&P 500 and the VIX.

But the Option Pit VIX Light can’t seem to jump over the hurdle and turn green.

Yesterday, at the mid-day lows it was there … But by the end of the day, it wasn’t.

But that doesn’t mean I’m not taking action …

Here is what I am trading …

With the VIX Light still set to yellow, I have to be on my toes to trade.

I’m looking for more of the wild swings we’ve seen both up and down with the S&P 500.

I’m also looking for huge swings in the VIX.

Here’s a trade setup that I like …

In iPath S&P 500 VIX Short-Term Futures ETN (Ticker: VXX), I went long on a call spread.

I decided on a call spread because currently, the VXX has a nasty skew, meaning that out-of-the-money calls get more and more expensive as we go up in strikes, due to higher implied volatility (IV).

Notice how the IV’s progressively get higher as the strikes go up.

I bought the VXX May 28 45-55 strike call spread for $1.75 …

Thus I am paying $1.75 to get 10 points of movement, which means I have a better than 4-to-1 risk reward.

Then, against this trade, I went to VIX options themselves, and bought five of the VIX June 17-strike puts for $0.25.

Remember, the VIX has made some nice moves lately, and is still flying around. I expect that type of volatility to last for another week or two.

But prior to the move, the VIX was below 17, and it still hasn’t broken out of its longer term downtrend.

These puts have traded as high as $0.80 in the last couple of weeks.

If VIX collapses, something I could 100% see happening, these puts could explode.

In the meantime, I’m hoping for one more blow up higher in VXX so I can profit off of my call spread.

And for now, the VIX Light remains yellow.

Your Only Option

Mark Sebastian

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