The Crash To Actually Be Worried About

The Option Pit VIX Light Is Red, And Volatility Is Likely To Drop.

Hey Traders,

First things first — if you haven’t already registered, it’s not too late to get your seat to the “Triple Threat Mentorship Event” kicking off at 11:30 a.m. EST!

I’m going live with two of Option Pit’s finest — Andrew Giovinazzi and Bill Griffo — and we’re going to be talking about some of the most important things to know about trading volatility this summer … including what might be the most important volatility event of the decade!

But you must register to claim your spot!

Now, back to the latest on the VIX …

The VIX settled at 16.33 on Wednesday … down 0.79 for the day.

The market was up and down and soft all day.

I know for a fact that traders are worried that VIX could blow up …

Because both traders and investors keep asking when this ship will crash.

For starters, there is no certainty that we are actually heading for a huge market crash …

In fact, I think traders need to worry about this fact: we now have only four trading days left for July VIX futures.

This means that if the VIX is moving, the July future is really going to react …

So … consider this: what if the VIX crashes instead of the market?

Take a look at VIX open interest in put options:

VIX futures settled 17.20 on Wednesday.

The open interest on the 17-strike puts and the 16-strike puts adds up to  a whopping 450,000 contracts. And when you add in the 15-strike puts, we are talking 600,000 contracts …

If the VIX starts selling off, we could see a ‘gamma squeeze’ in the VIX, pushing it lower as market makers hedge their short put options (believe me, they are short these strikes; I have noted huge July trades that have gone up).

Basically, if the VIX drops below 16, the July future is going to start selling off …

As it drops, market makers will have to sell more futures to hedge off their options exposure.

This hedging can actually feed on itself and push the future even lower.

The action in the futures can cascade into S&P 500 (Ticker: SPX) thus pushing the VIX even lower…

Now we are in a feedback loop that sends the VIX complex plummeting …

The VIX 17-strike puts are about $0.85, and the 16-strike puts are about $0.30. To me, both look like interesting buys …

And if you want to learn more about how a gamma squeeze and feedback loop works, we talk about that plenty in our Trading Legion program …

And if you attend our event at 11:30 a.m. EST, you can find out more …

Your Only Option,

Mark Sebastian


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