Richard CroftCBOE Volatility IndexVIX-ICOMMENTNov 09, 2018

There is a floor to the VIX where people expect a stock to be. He looks at it as investors feeding into a greed and fear Index. There are a lot of ways to hedge including the VIX. It helps to solidify that markets are selling off. When it goes above 25 or 30 you want to really look at your positions and be taking some profits. When the market bottoms the VIX will be spiking.

At his firm, they actually trade the underlying futures contracts as opposed to using the ETF. There are a number of ETFs to go net-long, go net-short, and to leverage on those plays. He can't recommend one, because he doesn't use them.

When you're using the leveraged ones, there's lots of potential adrenaline. They should only be used for very, very short-term views, days to weeks at the most. Never want to hold any leveraged ETFs beyond a few months because of the way they rebalance (buy high and sell low).

Put this on your list. All the exchanges are trading well.

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.

It is a great hedge against the market dropping. But your precision on trading vehicles that have forward-based pricing (like futures contracts), means you have to be a rocket scientist to understand how volatility works in order to use them effectively.

Correction with the trade war. How to hedge investments at this time. This is way too difficult to answer in 30 seconds.

Putting a butterfly spread on the VIX? This spread is sometimes called the Iron Condor, and you are putting the spread on in 4 different ways. Unless you are a very, very sophisticated option trader, you might as well set your money on fire and throw it in the air. You are going to be eaten alive by the market makers.

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 1^st and 2^nd 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.

A compilation of the S&P 100 on the prices of front contract Calls and Puts. When market participants expect higher volatility, they are willing to pay more for the Puts. The stock market is majority natural Long, so when market participants are bullish, they are unlikely to be more for the Call. The index usually goes up when the price of Puts goes up, i.e. when people are getting nervous. It is only “implied” volatility. He wouldn’t hold this for longer than a few months, because you get eroded by the transaction costs and the rebalancing.