Trading Volatility

Trading Volatility



Following the outbreak of COVID19 and the DJI plunging by 30%, volatility traders have already made substantial profits. While there are numerous strategies to make money in the stock market, trading the VIX is simple and lucrative. The VIX is a scale moving from 0 to 100, which tracks volatility in the stock market. For instance, when the market makes a serious correction dropping by 30%, you can be sure that the VIX is skyrocketing. 


By looking at how the VIX has moved in the past, traders can better understand how to make money by sitting in volatility. During an event like the corona virus or another catastrophe, the VIX will spike, but WILL always go down. Specifically, the VIX will usually climb for one to two months and then drop down hard. Even if you were unable to predict when the VIX would go up, you could make money taking the short side. Additionally, you could buy SVXY, which is the inverse of the VIX. Unlike the VIX, SVXY moves up during times of stability and drops during periods of volatility. With the VIX at 65, people positioned in SVXY or long at the money puts will be well taken care of!

For buy and hold investors the VIX is a breeze to trade. In the chart above, you will notice that the VIX typically bottoms at 12 - 13 points. During such lows, a buy and hold investor could buy the VIX at a bargain price and sit tight until the market whipsaws. If you are interested in trading volatility, we recommend that you steer clear from leveraged funds. Since the VIX snapped to 65 points, many inverse VIX funds that were leveraged went bust. As a result, we think it best to steer clear of anything leveraged for the VIX. 




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