The Option Pit VIX Traffic Light Is Red: Volatility is likely to decline.

Hey Traders,

We have talked in detail about how the VIX curve is out of whack.

While the front month (September) futures have fallen in line, the back end of the curve is entirely too premium-rich.

Notice September is only trading at a 1.5 point premium now. That’s about normal.

But everything after that? WAY too high.

This is why I was intrigued by a relatively big trade that went up in December.

A trader executed a 1-by-2 put spread on the cheap.

A trader bought 5,000 of the December 25-strike puts, which are deeply in the money relative to the cash index, but actually OUT of the money relative to December futures.

Against this, the trader sold 10,000 of the December 20-strike puts, which are out of the money relative to both the future and the cash index.

This trade hits a peak value at 20 and costs the trader 1.01.

This means if the VIX closes around 20 in December, the trader will make 4-to-1 on his or her bet.

I love this trade.

Right now you are saying … Mark, I cannot afford to put on a 1-by-2 put spread, the margin is too high.

Here is the key …

You do not have to.

For about the same price I can cut the margin on this trade by about 95%.

How?

I’ll be putting the trade out today in the Volatility Edge …

Your Only Option,

Mark Sebastian