The Option Pit VIX Light Is Red, Volatility Will Drop.

Hey Traders,

Coming off a long weekend, and heading into its final six days of trading before the next VIX futures expiration, the VIX is finally starting to normalize …

A little.

The VIX has been so out of whack for so long that it has come to making trades in the final week of options expirations to really clean up.

I see a few trades that really have me excited for this week.

In fact I did one today …

Here is what I am looking at, and a few ideas …

Coming off a long weekend, we expect the VIX to be up …

This is called the “weekend effect.”

The futures, which are a forward contract, do not have the weekend effect.

This is why the VIX can be up 1.15, and the futures barely move:

But over the course of this week, I expect the VIX to drop, and with only a few days until September expiration, I think VIX futures will have to follow.

With the VIX at 17.64 on a day the S&P 500 (Ticker: SPX) is down marginally and the Nasdaq 100 (Ticker: NDX) is up, there are plenty of trades to pounce on today that I would expect to have closed by Friday.

I still think the 15 puts for $0.05 are cheap, but take a look at the rest of the September options:

On pretty decent volume, traders are buying the 16-strike puts, the 17-strike puts, and the 18-strike puts.

I like owning the 16s for $0.05. That is WAY too cheap; these were over $0.25 last week.

The 17s are also cheap at $0.30. I would NOT mind owning those (and actually, I do own a bunch).

If you are worried about a pop, the 20-25 call spread only costs about $0.50. That is a nice hedge on a ratio of about 4-to-1 puts to calls.

Don’t forget, just two days from now, on Thursday at 7 p.m. ET, I’ll be going live in a no-cost special event to reveal how YOU can take your trading to the next level by doing this ONE thing like the pros.

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Your Only Option,

Mark Sebastian