Opinions
Richard Croft
CBOE Volatility Index
VIX-I
COMMENT
Aug 28, 2017
$11.320
Stock price when the opinion was issued
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COMMENT
From day to day, it will be very choppy. Volatility is telling him we are in a bear market. Not down 20% yet, but over the next 6 months, we will see the US stock market below 20% its peak. Canadian market is a different situation with exposure to energy and commodities. Won't see such a large correction. However, TSX didn't get as much of the upside.
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SELL
It's another indicator that tells us about nervousness by sensing volatility. If you own the VIX, this is probably a really good time to sell. It's right at the peak that we saw last August.
It's a background thing, not a way to perfect timing. Tells you the neighbourhood you're in, but doesn't tell you what to do. You can look at these moves in terms of standard deviations, and how far away from the average we are. Moves of 2 or 3 don't sound big, but they're actually quite big in terms of deviation from the average.
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For calls on the VIX. What ETF would you use and with what Strike Price and Call Price? There is an exchange traded note, very similar to an exchange traded fund, that is put out by Barclays iShares (VXX-N) that tracks the VIX. The challenge is that it is tracking short term VIX futures, which has been a steady downward turn on the underlying security. The reason is that you are constantly rebalancing the ETN every day based on the 1st and 2nd futures contracts on VIX, which is giving you a drag every day. This is not a long-term hold. It is a security you buy as a hedge against your portfolio. When VIX spikes, it moves 3% to 6% every single day. VXX is a very volatile instrument and a short-term one. Volatility, as an asset class, is about 6X more volatile than equities. That means you don’t need very much of this product to hedge an equity portfolio.