This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Mark Sebastian Analysis: VIX and the Markets

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews

Last week I was arguing with my partner Andrew Giovinazzi that volatility was a sale and markets were going to be fine. His response: What else are people going to buy? They can't buy stocks, they can barely buy bonds, and about the only thing that traders and investors can buy is put options and CBOE Volatility Index (VIX) products. That stopped me in my tracks and got me rethinking my trades for the balance of the week. Andrew's, and now my, belief is that the VIX will go up and up and up even as the market sits here no matter how overpriced VIX is. Why? Because there is nothing else to buy.

Recall the last time we had a big debate at the federal level? It was the end of the year in 2012, and the market, much like it is doing now, did absolutely NOTHING for two weeks into the close of business. But, as Dec 31st approached the VIX crept higher and higher and higher, because people were afraid of going 'over the cliff.' The ramifications of going over the cliff, are far less than the ramifications of not raising the debt ceiling. As we head toward October , if we still don't have a deal, I think we could see levels on the VIX not seen since 2011. I am not saying it SHOULD be there, or that it will stay there. In no way do I think we are going to see a 8% drop in the market from here...but that won't stop traders from buying options, because, it's about the only thing they can buy...besides cash.

How does one approach trading vol products and holding stocks and bonds. For starters, I don't think stocks are going to be much rougher than they already are, in my magic crystal ball I see the SPX hitting 1650, maybe 1625 at the lowest, but probably not diving lower wiping out the markets huge gains. Furthermore, when we do recover, look out, we might go right back to all-time highs.

I think the best approach is to trade the wave; buy VIX futures and SPX straddles and ride them for the week. I think they will have a hard time going down, and if one is lucky, they might actually go up. I like VIX call spreads especially because skew is so jacked up right now in VIX. In the SPX, this looks like an excellent week to hold some free gamma in SPX as I do not think we will see lot of decay coming out of the S&P's anytime soon.

For those that are less active, I like the idea of some longer term puts in iPath S&P 500 VIX ST Futures ETN (VXX). A December put in VXX gives the trader a chance to be short a 30-day duration future for the next 90, or so, days. I think that will be an excellent short at these levels. Add in the Sisyphus effect that comes with VXX and I think this one could do well, quickly. I would warn against a large VelocityShares Daily Inverse VIX ST ETN (XIV) position as I have seen that ETN tank on many occasions at a greater rate than VXX rallies. XIV is one that investors can wait to get in on.

OptionsProfits can be followed on Twitter at

Mark can be followed on Twitter at

EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.

At the time of publication, Mark Sebastian held positions in VIX.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
Top Rated Stocks Top Rated Funds Top Rated ETFs