Something Has To Give Here

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

Hey Traders,

As I have stated, a yellow light doesn’t mean the VIX is going to go up…

It just means there will be some crazy moves …

Tuesday was a crazy day, with the VIX having a nearly 3 point range …

Yet the August future, which has two weeks until expiry, remains over 20.

Something has to give.

Let me explain, and tell you what I think you should do …

On Tuesday, the VIX closed at 18.04 down 1.42 points, it had nearly a 3 point range on the day.

Volatility is clearly moving around quickly (thus the yellow light).

Yet the VIX futures curve remains incredibly bid.

Take a look at the current curve:

August has 10 trading days left to expire, 14 days total…

Yet August futures are currently trading a full 2 points higher than the VIX index.

The VIX index is trading at a huge premium to S&P 500 realized volatility, which stands at about 11:

The white line is 10-day historical volatility (HV, essentially realized volatility), the blue line is 20-day HV.

Something has to give here, folks.

Either the VIX needs to crash back down to earth …

Or the S&P 500 is on its last breath of running higher, and we are going to see a spike in S&P 500 movement (this means a sell-off).

I think it is the latter, but it totally could be the former …

So how do I play it?

I buy VIX puts …

And VIX calls.

A strangle.

The 18-strike puts cost about $0.60. That is really cheap relative to where VIX was a few weeks ago.

Against this, I can buy the 20-25 call spread for about $0.90.

Paying $1.50 for a strangle that wins if the VIX collapses (along with the futures), and pays if it pops makes a lot of sense to me.

This is similar to a trade I have on in my Volatility Edge program. 

Who knows, maybe some of the macro risks will subside … maybe the infrastructure bill causes a pop …

You just need to stay aware, and know how to trade whatever is coming …

Like Frank and Andrew do in Capitol Gains (which has already closed out a +63% winner).

Your Only Option,

Mark Sebastian


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