The Option Pit VIX Traffic Light Is Green: Volatility is likely to go up or stay high.

Hey Traders,

On Wednesday, the VIX dropped following the release of the Federal Open Market Committee (FOMC) meeting minutes.

If we get another day like Wednesday, we will likely see the Option Pit VIX Traffic Light flip to yellow.

But … that does not mean we are out of the woods.

While Wednesday was a relatively slow day for VIX options trading, I saw a few orders cross the tape that should raise some eyebrows …

Let’s take a look.

The VIX dropped 1.08 points on Wednesday to close at 28.37.

This means that the VIX is now pricing in about a 1.8% per day move in the S&P 500 (Ticker: SPX).

The SPX 10-day (white line) and 20-day (red line) realized volatility (RV) are still ahead of that number, however:

But … those numbers are clearly falling.

So does this mean the craziness is over?

Hedgers do not seem convinced.

Check out this order that went up:

A trader sold 6,000 September 40-strike calls for $2.80 to own 50,000 September 85-strike calls for $0.65.

This is 100% a hedge.

But the important thing is that this trader did it because she or he is still worried about the market.

We are still in a place where very bad things can happen.

Yes, over the last few days things seem to be calming down.

But until these hedges come off, know that the market is worried.

The play?

Buy puts and hedge with call spreads or call butterflies.

Your Only Option,

Mark Sebastian