The Option Pit VIX Traffic Light Is Yellow: Volatility is likely to swing wildly

Friday’s price action was wild for SPX.

It started the day under huge duress … only to turn around at the end of the day.

Now as we head into a new week we have two big events.

There’s the FOMC meeting and press conference on Wednesday … which also coincides with our other big event, VIX options and futures expiration on Wednesday morning.

Heading into the week, we are still in a partial backwardation that will expand on Monday morning due to weekend effect:

Going into the meeting and expiration, I think we are going to see some pretty heavy betting on the VIX going higher.

People are worried about a 1-point rate hike…

But I think cooler heads prevail.

On top of that, the market is now at a spot where it might be over hedged.

If the “Fed put” used to be a thing – the belief that Fed will step in and buoy the market if things get too bad –it feels like, as the market tanks, it is being replaced with the “S&P 500 put.”

And that is putting in a floor on the market until it doesn’t.

If we do get a 1-point rate hike, maybe markets tanks …

But, if it’s .75, I think we see a short squeeze that likely starts Monday into the FOMC meeting announcement on Wednesday and potentially carries through back to 4000.

I would be buying VIX puts in October on the cheap this morning.

Your Only Option,

Mark Sebastian