Use VIX To Trade The Fed

Mark Sebastian

Hey Traders,

For the first time in months, the Option Pit VIX Traffic Light has remained red for more than one day.

This is in spite of the market falling on Friday …

So what gives?

Are we headed for an extended rally back to all-time highs?

Obviously this is the question on everyone’s mind …

Generally speaking, when the VIX Traffic Light is red, the trend for the market is to rally.

In addition, when the light is red, the VIX tends to meander lower.

This would mean we could see a trip below 20 for VIX if everything lines up.

Again … option volatility on VIX is cheap. I am a buyer of August puts …

Especially given the massive contango (futures trading over spot) in the VIX term structure:

Near-term, we are probably going to see the VIX drop, potentially to near 20.

I mean if the market can drop 1%, and the VIX can drop …

It is going to take some work to get VIX to pick up again.

That said, the Fed announces rate decisions on Wednesday. This has been a risk-off signal for most of the year …

The plan?

Short vol Monday, buy it back on Tuesday night, go long post FOMC.

Your Only Option,

Mark Sebastian

VIX Edge

Mark Sebastian

Mark Sebastian is a former member of both the Chicago Board Options Exchange (CBOE) and the American Stock Exchange (AMEX), where he spent years mastering the art of options trading in the most competitive environment imaginable. As Chief Investment Officer at the hedge fund Karman Line Capital, Mark manages sophisticated options strategies for institutional clients. He is the author of two highly regarded books on options trading: ‘The Option Traders Hedge Fund’ and ‘Trading Options for Edge.’ Mark is a frequent guest on major financial networks including CNBC, Fox Business News, Bloomberg, and First Business News, where he provides expert commentary on market volatility and options strategies.

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