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

As the market opened on Monday – and the S&P 500 boomed higher by over 100 points – the VIX dropped like a stone…

Then, it stopped – and began to rally.

Even as the S&P 500 stayed relatively strong, the VIX got strong and stronger as the day progressed …

From just before 2 p.m. until the close, the VIX rallied about .65 points.

Enough for IV to actually be up, adjusted for the weekend.

Meanwhile, on the day, the S&P 500 was up 95 points!

So what happened?

Strike vol increased dramatically…

This is the IV of the 3700 strike on Monday – it was up … on a day the market was up.

So what does this mean?

Traders were selling stock and buying calls, essentially unwinding long stock and hedging market upside with calls.

This is a clear sign that what we saw on Monday was a short squeeze NOT the beginning of a long term rally.

We might see the S&P 500 rally another day or two … but this is almost certainly a fade.

This is why VIX out-of-the-money options expiring on Wednesday morning are still incredibly expensive.

There is a bid on VIX call options going all the way up to the 42.5 strike.

So what would I do is this …

If we open up on Tuesday, I am going to buy a call near the money and sell one of these crazy out-of-the-money calls against it.

If we turn around midday, just like Monday, I’m good … if not I have a very cheap play into Wednesday expiration.

Your Only Option,

Mark Sebastian