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

The S&P 500 closed on its highs on Tuesday at 3790.93.

So does this mean all is well?

The answer is no.

Here’s why …

Even as the S&P 500 was breaking to new highs, the VIX was well off the lows.

Look at this chart:

When VIX and the S&P 500 are rallying together, that tends to signal a top.

What we are seeing right now is a short squeeze: traders were so short the market that they are covering shorts as the market rallies.

To further the point, the biggest trade of the day was a November call spread.

A trader bought the Nov 35s and sold the Nov 50s

VIX settled the day at 29.07. It is going to go higher this week.

I am a buyer of upside call flies hedged with cheap VIX puts.

What do I mean by cheap?

Knowing VIX was in the low 20’s two weeks ago, the October 25 and 24 puts are WAY too cheap:

Questions? Shoot me an email or comment below!

Your Only Option,

Mark Sebastian