Spike or Swell

Hey Traders,

On Thursday, the VIX went from 21.34 to over 30 before settling at 28.89.

That is a huge move in the VIX by any standard.

But will it be meaningful a month from now?

That depends on if the VIX move was the beginning of a “swell” or just a “spike.”

Spikes in the VIX happen often …

We’ve had several in the last few months.

With the VIX over 20 for the last year nearly to the day, spikes are expected

Here are all the spikes from the last six months:

Of these, you could argue that we maybe had two mini swells, in September and November.

Mostly, though, these were obvious spikes.

Spiking or Swelling?

A spike in the VIX tends to happen suddenly and out of nowhere.

Then, almost as quickly, it disappears. The most obvious example was the Capitol Hill riots in January.

A swell on the other hand is more like a wave …

It starts slowly in the middle of the ocean, and then grows and grows and grows …

The next thing you know, a tsunami is hitting the shore.

A typical swell starts with a move higher in the VIX, followed the next day by a slightly bigger move…

The next day there is typically a pronounced move higher, one where novice traders might step in and try to short …

There may even be a down day on the VIX the next day …

But the down day will NOT touch the high of the previous day.

Then … the VIX begins to go up again and again until finally … BOOM — VIX spike!

But when the spike happens, VIX is already up 5-10 points from before where the swell began.

This classic example of a swell took place a year ago:

Notice the seemingly relentless rise in the VIX over a one- week period … followed by some SLOPPY chop …

Which NEVER touches the low of that 1st big candle …

And then another relentless rise.

Swells lead to the VIX going up essentially for a month straight, similar to the stock market climbing a “wall of worry.”

How About Now?

True swells happen about once every 2-3 years.

The previous swell to the one above was in January and February of 2018.

Prior to that … August 2015, August 2011, May 2010 and Summer 2008.

For what happened Thursday to truly matter,  I need to see more than one day of fear.

I need to see the VIX up on Friday.

If it IS up today, I’ll switch the Option Pit VIX Light to Yellow, meaning heavy movement is likely — in either direction.

Because Monday could end up being ugly.

Bad Thursday/Worse Friday/Crash Monday is a classic pattern that dates all the way back to 1987.

Now, I’m not so certain Thursday was anything more than a spike.

We DID have volatile trading on Wednesday, but that ended with a vol crush.

Thursday’s move wasn’t out of nowhere, but it certainly was  not “swelled” into.

Basically, Thursday has to be a spike — OR the very beginning of a swell (likely to be a mini swell, if it is).

Today’s action is key.

Thinking Strategically

I did pair some of my long volatility hedges at the end of the day on Thursday, because I’m not fully certain the action is much more than a one off event.

If I am wrong — and I’ll know by the end of the day Friday — I can make adjustments.

For now, I like the trade I posted yesterday even more …

I’m a buyer of the April 23-20-16 put fly for about .05.

There are several other trades that are more designed for professionals that I threw in our Pro Chat room.

One being the May-June 35 put spread in VIX (buying May).

This is essentially a way of ‘curve trading’ (trading one month against another) using options instead of futures.

At the end of the day the middle of the curve did get really flat


The May-June 35 Put Spread allows me to, in a risk adjusted manner, get short May and long June futures.

The Option Pit VIX Light Is Red (for now), and volatility is likely to drop.

Your Only Option,

Mark Sebastian

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.