Intermediate Trade: SPDR S&P 500 ETF Trust

It's shaping up as an ugly afternoon for the market. Right now, as the SPX is flat, the VIX is up big, and even more interesting, the VIX futures are being bid up substantially. Traders are buying all sorts of protection using the vol products, to the point that the VIX is extremely close to firing a "long vol" signal. A long vol signal occurs, for me, when VIX cash is over the front month future (which is now December) and the front month future is over the second month future.

When I get a long vol signal there are a few things I know. Most notably, I do not want to be short premium and long stocks will have a negative expectancy. Think about this, if all I did was go into cash when I got my long vol signal, I would have picked up about 800 extra SPX points.

My guess is that in the next day or two there is a serious chance for a rip lower back toward the 50-day moving average we touched Sunday night in the S&P futures. I like owning SPDR S&P 500 ETF Trust (SPY) put spreads. I can buy the SPY December 199/194 put spread for less than $1.00. That is a good risk/reward and pays off nicely if I get that "long signal." If the thing turns around I'll dump it at $0.50.

Trade: Buy to open 1 SPY December 199 put for $2.53; sell to open 1 SPY December 194 put at $1.53.

At the time of publication, Sebastian had no posiitions in the securities mentioned.