CBOE Volatility Index (VIX-I)

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.

How do you trade it? You have to get it perfect or you don’t make a lot of money on these things.

This is a high-stakes game and a risky one, because it is trading on volatility. If you like to gamble, you can play this, but if you are a more conservative investor, stay out.

This is down at some historical levels. We are within a breadth of that level we had seen in 2007 where it had exploded. Whether it is an investment for you or an indicator, it is a fast twitch. Graph shows it just broke down through the band a little bit to $11.36. If you go back 6-7 years, it’s very close to the $11.08 back in 2007. To invest in it, it has been a decaying instrument. He would make much of this until it got about $15.

To trade this as an investment is a really tough thing. He watches this, but only as a proxy. The thing with any of these units you have to remember is that they have an element of decay about them. There is going to be big volatility in any of these trades. Right now this is showing some upside move, but it does not stay there very long.