With indices wobbling and all eyes on the Fed, I think there could be a push to 30-35 on the Volatility Index (VIX) on further weakness. If the VIX closes above 35, the market could implode into year-end as fund managers try to limit their losses and completely write off 2015. One way to trade the VIX is by using the iPath S&P 500 VIX Futures ETN (VXX). These options were active on Friday, with traders buying and selling both calls and puts.

The chart below shows the gap higher to end last week and the close above 20 and the 200-day moving average. The next layers of resistance are at 25-27, with a chance that 30 could come into play on panic selling.

The VXX December 25 calls (VXX151218C00025000) closed Thursday’s session at $0.28 and surged roughly 380% on Friday. Volume came in at over 13,700 contracts, and these options expire this Friday.

The VXX January 30 calls (VXX160115C00030000) zoomed 156% on Friday on volume of more than 1,200 contracts. These options could be used on a further rise in the VXX, but they are nearly 7 points “out-of-the-money” and have become extremely expensive. Friday’s high reached $2.35.

Meanwhile, the VXX December 20 puts (VXX151218P00020000) fell 70% on Friday on volume of nearly 15,000 contracts. These options also expire this Friday, which would represent a lottery play on VXX closing back below the 20 level, and 19.70 just to break even. While possible, the odds are great that the aforementioned options will expire worthless by Friday’s close.

The VXX January 20 puts (VXX160115P00020000) collapsed 47% on Friday on volume topping 5,500 contracts. These puts could become a little cheaper heading into the Fed meeting on Wednesday and a continued rise in VXX. If resistance at 25-27 holds this week, these options could be used as a possible trade on Thursday, Friday or early next week for a possible declining VXX into mid-January.

While the Fed has said it felt good in recent weeks about hiking interest rates, one thing it probably wasn’t counting on is a falling stock market and the continued weakness in commodities and oil. Europe has started its stimulus package to try and juice up its economy, and its interest rates are headed lower.

This divergence could cause some uneasiness in the coming months with a rising dollar and a sinking euro, provided the Fed raises rates this week. If it panics and doesn’t raise rates, what little credibility it has left will be ruined.

December option expiration week is usually a bullish time period for the market. A positive close today would be helpful for a possible bullish rebound this week, but the bears will likely take advantage of the nervousness heading in Wednesday’s possible rate hike.

This week is setting up to be one of the most explosive we will see all year in the market, to the upside or downside, so be prepared for wild price swings. Once the dust settles, we should be in good position to play a possibly momentous rally if support holds. If not, it might be time to turn bearish for what could be a rocky finish to the year.

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