The Option Pit VIX Traffic Light Is Green: Volatility Is Likely To Stay Elevated.

Hey Traders,

The S&P 500 (Ticker: SPX) had another wild ride on Tuesday.  At one point, it almost got back to flat after being down over 70 points.

But in the end, it closed down 1%, and VIX went up.

So the question people are asking now is: how long will this last?

And what should they be doing …

(I went over that during last night’s event … catch the replay here.)

Here is what you need to know right now.

The VIX closed below 30 on Tuesday.

Coming off of a long weekend, we would expect it to be higher by about 1.00, thus vol was definitely up, though not by as big of a margin as it might appear …

That said, futures were actually off a touch, which is why ProShares Ultra VIX Short Term Futures ETF (Ticker: UVXY) closed the day down.

However, to be clear, something bigger is going on.

The VIX futures have been flat or in backwardation since February 10th:

If you look back historically, the longer things stay this way, the worse they can get.

Right now, it feels like there could be a serious ball to drop …

The market might play rope-a-dope over the next day or two as the Russia-Ukraine fiasco plays out.

But let me be clear …

THAT IS NOT WHY WE ARE SELLING OFF.

We are selling off because of inflation and the FOMC.

At this point, we already have a lot of the high beta names down 50% or more.

But, there is another shoe to drop.

I took note last week that we saw huge put buyers in Apple (Ticker: AAPL) at the 135-strike in March.

If that shoe drops, VIX is going to 50.

Right now I continue to think the play is a long call spread hedged with puts.

We continue to see call buyers out in force, and out-of-the-money put buyers. 

There is a reason.

VIX could go to 50 …

But when it does drop it will drop fast.

I would be long call spreads and long puts.

Your Only Option,

Mark Sebastian