VIX Plays Reminder

As I’ve mentioned before, whenever the market volatility index, the VIX, spikes over 30 (and especially over 35), a market recovery follows. Historically, this has never failed. (See the weekly charts of the VIX versus the SPX below.) The only variable to this equation is the length of the recovery. Some recoveries last for years while others only last for several weeks. Whatever the case, what are the best ways to profit from this market phenomenon?

Fortunately we’ve already examined this in the July 15th blog, the last time the VIX rose over 30. This signaled a short-term rise in the market. In the four succeeding weeks, the S&P rose 90 points (over 7% ) before rolling over. Had we bought the tracking stock, the SPY, we would have made 8% (the tracking stock doesn’t track the index exactly), but if we had bought, say, the December 120 calls, we would have made around 40% on the trade. Remember now that I’m assuming perfect timing, something that’s much easier to accomplish in theory than it is in practice. We have the cue when to enter the trade, but the exit timing is more nebulous. A trailing stop or a trendline stop is better than no stop in this case.

So, if you want to make a play on declining volatility (although past performance is no indication of future success blah blah blah), check out your favorite tracking stock and put on a position in either the stock or a bullish options play, depending on your level of expertise and risk.

Popular tracking stocks with liquid options:
SPY-S&P 500
DIA – Dow Industrials
QQQQ – Nasdaq 100

Leave a Reply

You must be logged in to post a comment.