The VIX Light Has Changed from Red to Yellow

Hey Traders,

We got an inkling that this could happen on Monday when one of Option Pit VIX Light sub-indicators started blinking yellow.

While it turned off on Tuesday, I warned you that it was pretty darn close.

I mentioned I liked long SPX, but also long VXX straddles, so that I would have a hedge.

Today is why we want that hedge when things are close …

The S&P 500 dropped …  but more importantly, the VIX popped.

While 100 points in the S&P 500 might sound like a lot, in truth it's less than a 3% move.

The VIX, though … wooow.

It blew higher to 37% and the VIX curve turned backward (VIX cash is over Feb., Feb. is over March, March is over April and so on …).

If we have this structure for more than a day, the VIX Light is turning green.

And I suspect it will be green in the AM. Because two days in a row of the VIX term structure (the relationship between VIX futures prices and their maturity dates) above 100% produces a green light

Here is the beauty of it though, there is still PLENTY of time to hedge.

While the VIX is 37, the SPX is really not that far off its highs.

We have shockingly dropped all the way down to the lows of *checks notes* Jan. 15.

Holding a long portfolio on Wednesday, I did not dump my long position …

What I did do was buy VXX

Why is that, Mark?

Because VXX is a great proxy for a long VIX future …

And when we are in backwardation — the backward VIX curve I mentioned earlier — the “roll yield” actually works in your favor. (Roll yield is the act of VXX selling near-dated futures to buy longer-dated ones to keep duration at 30 days. It tends to cause a drag on VXX when futures are in a contango, but can act as a tail wind when we are in backwardation like we closed on Wednesday.)

Crisis Management

I am a firm believer in Crisis Alpha, which is the process of going long protection as the market starts to get crazy and not carrying a constant hedge.

Heading into Thursday, I want to have a long volatility position and I want to be closing my winners.

Today, I aggressively closed winners in my Sharp Bets trading program, including names like WBA.  

In Volatility Edge, I set out a long VXX call spread.

In my own portfolio that I manage, I bought VXX.

Going into tomorrow, if we stay backward, we might make a run higher in VXX for a few days …

But this does not feel like a protracted sell off to me.

I think it makes sense to go long volatility, taking profits and rolling as the VIX rallies.

The VIX Light is YELLOW, meaning the VIX could go either way.

Your Only Option,

Mark Sebasitan

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