Stock price when the opinion was issued
A proxy for the volatility index, is a short-term trading vehicle and has a negative correlation with equities and is 6X more volatile than equities. You don’t hold this for a long-term basis. It is a very leveraged investment. They deal with rolling futures contracts on volatility. Feels the volatility is skewing upwards for the next 3-4 months. A wonderful product if you are in it at the right time such as getting a very significant downturn in the market, which causes a spike in volatility. He is not clear that we are going to see any dramatic move in next 3-4 months.
The key with the volatility index is that there are 2 ways of playing it. There is a speculative way, which is not recommended. Then there is the conservative way which is basically to buy the volatility index as portfolio protection. Seasonality on this is that it bottoms in the 1st week of July, and then goes higher right through until the middle of October.
At this time of year, this tends to be kind of flat, but starts moving higher right around August, and spikes right through until October. That’s the time when unusual events start to happen. As you get further into the summer, look for the possibility of taking some money off the table. What could affect it this year, is if the Fed decides to bump up interest rates. Of greater importance is the possibility of some sort of a negative situation happening with the US presidential election. As we get into September/October, that is the time when the market has a history of doing very, very poorly because of uncertainties of what is happening. Uncertainties are caused by negative advertising, so this year look out, as the Supreme Court said super PACs can spend as much money as they want on the election. That means that in September/October things are going to get brutal.
This index has very, very strong seasonality. Normally its period of seasonal strength is from around the beginning of July right through until about the middle of October. Usually some unknown event happens during this time. Last year was China, and the previous year was Ebola and the Ukraine, etc. This year it could be something like the US presidential election. Last week it hit a very important low. It hasn’t shown the historic move for volatility as yet. The odds of it happening between now and the middle of October are very high.
Strike price and Call price when buying the VIX? An ETF that tracks the VIX and is actually an exchange traded note. It tracks short-term volatility on the S&P 500 index. The NASDAQ also has one (VXN-N) which tracks the NASDAQ 100 index. The chart shows a long downward path. You have to look at this as an instrument that you use to hedge a portfolio to offset a volatility spike where the market has fallen. Those Exchange Traded notes have options, so you are really getting an option on an option. Because Exchange Traded notes are 6X more volatile than the underlying S&P 500 Index, the premiums are 6 to 10 times what you would expect to get. Spikes are hard to pick, and that is the challenge with this.
You have to recognize that volatility ETF’s do decay and are not good holdings longer-term. They are definitely short-term trading vehicles and should have a very low time horizon. This one has an excellent trading volume, and definitely for short-term traders.