Spike or Swell: Part 2

Hey Traders,

The last time the VIX actually experienced a swell was way back in August.

Notice below how the VIX started to rally in the middle of August — ALONG WITH the S&P 500:

Over the next few weeks, once the VIX popped, the S&P 500 sold off beyond its initial drop.

It bottomed out at the end of September.

What We See Now

Now let’s look at what happened in the last couple of weeks:

While the VIX rose modestly, it was in conjunction with a falling S&P 500 …

Then we had our VIX shock, which sort of came out of nowhere — VIX had actually been down over the previous two sessions.

So when I saw S&P’s 90-point rally on Monday, I asked myself if I believed it.

The answer was …

Yes, I do.

I think what we saw last week was a spike.

And once the VIX falls back quickly after a spike, it tends to lead to an uptrending market for several weeks.

So I expect the Option Pit VIX Light to go Red on Tuesday, with the VIX heading down.

I also expect some follow through on Monday’s market.

I would be using this opportunity to fade VIX (alongside all the size traders who have been long on-the-money puts for a few weeks.)

Money Move to Make

I would be a buyer of VXX 15 puts for 1.25. There is a huge sloping contango now (futures price is higher than the spot price) and the VIX appears to be heading to sub-20.

The VIX Option Pit VIX Light Is Yellow, and we expect big moves in VIX.

Your Only Option,

Mark Sebastian

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