The news on the tape and on most of the financial networks is bleak and unsettling. Housing Starts are at multi-decade lows, inflation is rearing its ugly head, and oil still languishes in the 120 range. And we have not even gotten to the Financials and the dreaded duo of Fannie and Freddie. So what gives with this market? How is it possibly holding up and not getting decimated? As an options trader, I am accustomed to watching the VIX, or Volatility Index, to give me clues as to what market bias the "fear gauge" may tell me. Looking at the charts below, I can see that in the Year-to-Date we have had three occasions when the VIX has poked its head above 30, and the broader market (SPX) has had significant moves downward on each occasion.

This correlation is not surprising to anyone; the market and options pricing reflect the trading environment. The market is also a forward-looking vehicle, and thereby the VIX generally reflects the expectations of the broader market. That being said, the VIX has been hovering around 20 throughout this latest round of "turmoil" and seems to be telling us that another steep drop in the market is not in the cards. I find the VIX to be a very useful tool in giving me an edge in predicting market movement. My take on the current VIX would lead me toward trading in a market-neutral to mildly Bullish trade. I would consider using this opportunity to place an Iron Condor with a slightly Bullish bias. For example, using the SPY in September Options, I could sell an Iron Condor and place the vertical put spread three points below the current trading price of 127 and sell a vertical call spread four points above 127. So in this case, it would be a 123-124 put spread and a 131-132 call spread. That will yield a premium of just over $50 on a $1.00-wide spread on both sides. It is more aggressive than we normally trade, but we are trying to capitalize on a channeling or indecisive market. The risk is roughly $50, as is the reward and our time frame is relatively short, giving us a shorter risk window. Good Luck, and Happy Trading!

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.