Playing the VIX, a Fast Way to Loose Money

Playing the VIX, a Fast Way to Loose Money

Playing the VIX, a Fast Way to Loose Money


Warning: Betting against stock-market volatility is a recipe for investment disaster.

Trading the benchmark S&P 500 (NYSEArca:SPY) Index and evaluating stocks on an individual basis, and not trying to outsmart the CBOE Volatility Index aka VIX, (NYSEARCA:VXX) a measure of expected stock volatility, aka “the fear index”.

The VIX is not the fear index, it is a measure of potential volatility in either direction.

People thought that President Donald Trump would bring with him a wave of market volatility, but from the start, the opposite is true. The day after his election on 8 November, the VIX dropped about 25% lower than its daily average since Y 1990.

The VIX has been more active in the last month.

The index moved more than 30% last Tuesday as unease builds around NKorea and as the US prepares for another major hurricane of the season. The gauge is still on track to post its lowest annual average ever.

But, some people have the notion that if the VIX spikes, the market’s going to go down.

Not so, when the VIX spikes, it means the market could go up or down. If you go back to the bottom on 9 March 2009, and the VIX was telling people that there were going to be another 2 years of a Bear market, look what happened.

The VIX tells us about volatility, not direction. And it is meaningless with regard to the future of the market.

In this steady up-trending market, people have found the VIX as play. It seems a fast way to lose money.

Investor reactions to NKorea’s recent nuclear activities show stock market drops, spikes in volatility, Gold and JPY, typical “risk-off” moves often reverse within a few days, sometimes within hours, Reuters reported.

For the 1st 3 nuclear tests by NKorea, the VIX snapped back to previous marks within 2 days. The VIX stayed elevated longer in the wake of the 9/11 attacks than NKorea’s latest nuclear test.

The highs the VIX hit on 9/11, the collapse of Lehman Brothers, Brexit, the Y 2016 US elections, and the 2015 Greek debt default are all higher than the levels seen on 4 out of the total of 6 nuclear tests by NKorea.

Investors are not worried about NKorea, tune out the Noise

HeffX-LTN Analysis for VXX: Overall Short Intermediate Long
Bearish (-0.44) Bearish (-0.37) Bearish (-0.35) Very Bearish (-0.58)
HeffX-LTN Analysis for SPY: Overall Short Intermediate Long
Bullish (0.31) Very Bullish (0.50) Neutral (0.19) Bullish (0.25)

Stay tuned…

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