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

The SPX sold off on Monday, dropping 52.79 points – good for 1.3 % and a close below 4020.

The VIX rallied and got over 20 for much of the day, before finally closing at 19.94, just short of 20.

Now that we had this selloff after what seemed like a relentless rally, what is next?

Today is that last day of what has been a great January.

Maybe that’s a reason to sell … maybe it’s a reason to create window dressing.

I wrote up a report for Mad Money with Jim Cramer on Monday in which I broke out the short and long term implications of what the VIX has been doing.

In short, we are in a cyclical decline. However, there is another trend buried within this trade …

New lows in VIX have been getting bought for over a year…

We actually closed on the lows for the year on the 13th, not in the last few days despite the market moving higher.

As you know, a rallying market and a rallying VIX are usually not a great thing…

Friday’s 4080 fail might be telling – I think certainly for Tuesday and potentially for February…

I think traders should be taking dollars out of high beta (which measures a stock’s volatility as it compares to the volatility of the market), selling the high flyers and looking for opportunities to re-enter these names at lower levels.

For VIX, take the pop as an opportunity to buy cheap out-of-the-money puts in August or September. I think by then the index will be much lower.

The best way to do that?

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Your Only Option,

Mark Sebastian