Market Trends

An Easy Cheat Sheet for Understanding Market Volatility

April 19, 2018

author:

An Easy Cheat Sheet for Understanding Market Volatility

Volatility hasn’t been of much concern for the past five years.

As you can see below, the CBOE Volatility Index (VIX) was tame heading into January.

It was almost too tame…

That isn’t normal!

The VIX measures market volatility by gauging how many put and call options are being bought and sold on stocks in the S&P 500.

Many believe the VIX is a leading indicator… It isn’t.

The VIX is a lagging indicator. It reacts to what is happening in the market… It doesn’t cause things to happen in the market.

But once it rears its head, people begin to use it as a real-time measure of what is going on. That can be effective in the short term, as it is a direct and accurate reflection of the market.

I use the VIX all the time. It is one of the many indicators that allow me to gauge the direction of the market, how fast it’s moving, and how much panic or complacency exists.

And I do know one thing for sure: Complacency can last for a long time. Panic does not.

Get out a notepad and write this down: The sweet spot for the VIX is its historical range, between 15 and 25.

It’s not normal for the VIX to trade below 15 and stay there. The lower it trades, the less normal it is. A reading between 9 and 15 reflects market complacency; it’s a warning sign if it stays there too long.

And if the VIX drops below 9, you should be looking over your shoulder. In the fourth quarter of last year, the VIX traded below 10. A reading that low (or below 9) should really scare the heck out of you. It means investors are a little too relaxed.

In these situations, you should lighten up on stocks. Instead, you should buy puts. That’s because when volatility is low, options are cheaper. As volatillity increases, stock prices will nose-dive and you’ll be able to profit from the market drop.

Back to that notepad… When the VIX is trading above 25, the market is experiencing above-normal volatility. This is when you should start dipping back into the market. It’s also when you should sell options to collect higher premiums.

When the VIX is above 30, we are entering a mini correction. Start buying more stocks and selling more puts. (Just for some perspective, the VIX was trading above 30 during the recent mini correction in February.)

When the VIX moves above 40 – a very rare occurrence – it’s time to accelerate your purchasing.

Finally, when the VIX goes above 50 or 60, it’s time to take out a second mortgage and go all in! The VIX has jumped to levels above 70 just once – during the lows of the 2008 and 2009 correction.

If you were buying then, you would have increased your wealth severalfold in the years ahead. Even putting your money into an index fund would have made you four to five times your initial investment.

Now that you know what levels to look for, how do you “play” the VIX easily?

There are several exchange-traded funds and options that give you exposure.

My favorite is the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX). This is an exchange-traded note (ETN) that should be used for only short-term trading or protection during volatile periods. It is NOT meant to be a long-term holding.

When the VIX starts moving above 15, you can buy shares of this ETN. It will begin to move higher as the market goes lower. At the beginning of the most recent correction in mid-January, the Short-Term Futures ETN was trading as low as $25.50. By the peak of the correction, it was trading above $55.

Since this is a short-term fund, you need to treat it as you would an option. Remember, the time to start selling is when the VIX moves above 30. You should be all out by the time the VIX jumps above 40.

Shares of the Short-Term Futures ETN are easy to trade on any exchange and through any broker. Because the ETN uses futures on the VIX, it will lose value over time as result of “leakage,” meaning new futures must be bought and old futures near expiration must be sold. Therefore, you should never buy this for longer-term protection.

For that, you should buy a longer-term security, which I will share with you next week.

Good investing,

Karim

81 Comments
  1. oprol evorter

    Greetings from California! I'm bored to death at work so I decided to browse your website on my iphone during lunch break. I enjoy the knowledge you provide here and can't wait to take a look when I get home. I'm amazed at how quick your blog loaded on my cell phone .. I'm not even using WIFI, just 3G .. Anyhow, excellent site!

  2. Indigo

    Hi, very nice website, cheers! ------------------------------------------------------ Need cheap and reliable hosting? Our shared plans start at $10 for an year and VPS plans for $6/Mo. ------------------------------------------------------ Check here: https://www.good-webhosting.com/

  3. wristbands

    I went over this site and I conceive you have a lot of excellent information, saved to favorites (:.

  4. click to find out more

    hi!,I like your writing very much! share we communicate more about your post on AOL? I need a specialist on this area to solve my problem. Maybe that's you! Looking forward to see you.

  5. I like this web site very much, Its a very nice billet to read and find information.

  6. industry research reports

    I?¦m no longer certain the place you are getting your info, but good topic. I needs to spend some time studying more or working out more. Thanks for excellent info I was in search of this info for my mission.

  7. visit homepage

    Hi there! This post couldn’t be written any better! Reading through this post reminds me of my previous room mate! He always kept talking about this. I will forward this article to him. Pretty sure he will have a good read. Thank you for sharing!

  8. navigate to these guys

    I truly enjoy studying on this internet site, it has wonderful content. "Don't put too fine a point to your wit for fear it should get blunted." by Miguel de Cervantes.

  9. Buy Melanotan 2 UK

    Hey there are using Wordpress for your site platform? I'm new to the blog world but I'm trying to get started and set up my own. Do you need any coding expertise to make your own blog? Any help would be greatly appreciated!

  10. web link

    I've been browsing online more than three hours today, yet I never found any interesting article like yours. It is pretty worth enough for me. In my view, if all web owners and bloggers made good content as you did, the web will be much more useful than ever before.

  11. follow url

    Hiya! I know this is kinda off topic nevertheless I'd figured I'd ask. Would you be interested in trading links or maybe guest writing a blog post or vice-versa? My website goes over a lot of the same topics as yours and I believe we could greatly benefit from each other. If you might be interested feel free to send me an e-mail. I look forward to hearing from you! Wonderful blog by the way!

  12. here

    There is noticeably a bundle to know about this. I assume you made certain nice points in features also.

  13. Illinois Car Shipping

    When I originally commented I clicked the -Notify me when new comments are added- checkbox and now each time a comment is added I get four emails with the same comment. Is there any way you can remove me from that service? Thanks!

  14. company website

    Useful information. Lucky me I found your web site accidentally, and I am stunned why this coincidence didn't happened in advance! I bookmarked it.

  15. Buy Phentermine online

    I¦ve been exploring for a little for any high quality articles or blog posts on this kind of house . Exploring in Yahoo I at last stumbled upon this web site. Reading this information So i¦m satisfied to convey that I've an incredibly good uncanny feeling I discovered exactly what I needed. I so much undoubtedly will make certain to do not overlook this site and provides it a look regularly.

  16. Utah Car Shipping

    I dugg some of you post as I cerebrated they were extremely helpful very helpful

  17. replica Fendi bags

    Great post. I am facing a couple of these problems.

  18. ephedrin kaufen

    Hi there! I just wanted to ask if you ever have any problems with hackers? My last blog (wordpress) was hacked and I ended up losing a few months of hard work due to no back up. Do you have any methods to protect against hackers?

  19. Tapered Roller Bearings

    I like reading through and I believe this website got some really utilitarian stuff on it! .

  20. Black Money

    I'd incessantly want to be update on new articles on this site, saved to my bookmarks! .

  21. I like what you guys are up also. Such intelligent work and reporting! Keep up the excellent works guys I’ve incorporated you guys to my blogroll. I think it'll improve the value of my website :)

  22. Acheter Clomiphene citrate

    Thanks for sharing superb informations. Your web-site is so cool. I'm impressed by the details that you have on this website. It reveals how nicely you perceive this subject. Bookmarked this website page, will come back for more articles. You, my friend, ROCK! I found simply the information I already searched everywhere and just couldn't come across. What an ideal web-site.

  23. click this link now

    Whats up very cool web site!! Man .. Beautiful .. Amazing .. I'll bookmark your site and take the feeds also…I am happy to find so many helpful info right here in the submit, we'd like work out extra strategies in this regard, thanks for sharing. . . . . .

  24. winkslots Casino UK

    You got a very excellent website, Sword lily I detected it through yahoo.

  25. his explanation

    I think you have remarked some very interesting points, thankyou for the post.

  26. check out here

    You really make it seem so easy with your presentation however I find this topic to be actually something which I think I might by no means understand. It sort of feels too complicated and very vast for me. I'm having a look ahead in your subsequent publish, I will try to get the hang of it!

  27. websites

    Good write-up, I’m regular visitor of one’s site, maintain up the nice operate, and It's going to be a regular visitor for a lengthy time.

  28. tryebony

    It?¦s actually a great and useful piece of information. I?¦m happy that you just shared this useful information with us. Please stay us up to date like this. Thank you for sharing.

  29. see this site

    whoah this blog is wonderful i love reading your articles. Stay up the good work! You already know, many people are hunting round for this information, you could help them greatly.

  30. I have been reading out some of your posts and i must say nice stuff. I will surely bookmark your site.

  31. read

    naturally like your web-site however you need to take a look at the spelling on several of your posts. A number of them are rife with spelling problems and I find it very bothersome to tell the truth then again I?¦ll surely come again again.

  32. It?¦s in point of fact a nice and helpful piece of information. I am glad that you just shared this helpful info with us. Please stay us informed like this. Thank you for sharing.

  33. An interesting discussion is worth comment. I think that you should write more on this topic, it might not be a taboo subject but generally people are not enough to speak on such topics. To the next. Cheers

  34. Outstanding post, I think people should larn a lot from this blog its really user genial.

  35. togel singapura

    I have read a few just right stuff here. Certainly price bookmarking for revisiting. I wonder how so much effort you place to create the sort of fantastic informative site.

  36. syair hongkong

    Hello my friend! I want to say that this article is awesome, nice written and include almost all significant infos. I would like to see more posts like this.

  37. Carpet Cleaning Service

    It?¦s really a great and helpful piece of information. I?¦m glad that you just shared this useful information with us. Please stay us up to date like this. Thank you for sharing.

  38. cobalt glass rocks

    Hello, you used to write fantastic, but the last few posts have been kinda boringK I miss your great writings. Past few posts are just a little out of track! come on!

  39. 784428

    120563

  40. o5x3vchwmj8ebzb0ymb53zxn0ptvkcc27vold

  41. gain strength

    Hey there just wanted to give you a quick heads up. The text in your post seem to be running off the screen in Safari. I'm not sure if this is a formatting issue or something to do with web browser compatibility but I figured I'd post to let you know. The layout look great though! Hope you get the issue resolved soon. Cheers

  42. check these guys out

    I wanted to thank you for this great read!! I definitely enjoying every little bit of it I have you bookmarked to check out new stuff you post…

  43. buy face mask

    obviously like your web site but you have to check the spelling on several of your posts. Many of them are rife with spelling problems and I find it very bothersome to tell the truth nevertheless I’ll certainly come back again.

  44. werewolf wild pokie

    I take pleasure in, cause I found just what I used to be taking a look for. You have ended my 4 day lengthy hunt! God Bless you man. Have a great day. Bye

  45. smoretraiolit

    I'm really impressed with your writing skills and also with the layout on your weblog. Is this a paid theme or did you modify it yourself? Anyway keep up the nice quality writing, it is rare to see a nice blog like this one nowadays..

  46. Les ptits tutos

    Appreciate it for this tremendous post, I am glad I discovered this website on yahoo.

  47. web link

    Fantastic web site. Lots of useful information here. I’m sending it to some friends ans also sharing in delicious. And of course, thanks for your effort!

  48. erjilopterin

    What’s Happening i am new to this, I stumbled upon this I have found It absolutely helpful and it has helped me out loads. I hope to contribute & assist other users like its helped me. Good job.

  49. When I originally commented I clicked the "Notify me when new comments are added" checkbox and now each time a comment is added I get several e-mails with the same comment. Is there any way you can remove me from that service? Thank you!

  50. read

    Hello I am so thrilled I found your blog, I really found you by mistake, while I was browsing on Aol for something else, Nonetheless I am here now and would just like to say cheers for a tremendous post and a all round thrilling blog (I also love the theme/design), I don’t have time to read through it all at the moment but I have book-marked it and also added your RSS feeds, so when I have time I will be back to read much more, Please do keep up the awesome job.

  51. you can try this out

    That is the fitting blog for anybody who needs to search out out about this topic. You notice a lot its almost arduous to argue with you (not that I really would want…HaHa). You definitely put a brand new spin on a subject thats been written about for years. Great stuff, simply nice!

  52. website url

    Good V I should definitely pronounce, impressed with your site. I had no trouble navigating through all the tabs as well as related information ended up being truly easy to do to access. I recently found what I hoped for before you know it at all. Reasonably unusual. Is likely to appreciate it for those who add forums or something, web site theme . a tones way for your customer to communicate. Nice task..

  53. grolyrto lemcs

    I do agree with all the ideas you have presented in your post. They're really convincing and will certainly work. Still, the posts are too short for newbies. Could you please extend them a little from next time? Thanks for the post.

  54. useful source

    Some really nice and useful information on this website , as well I think the design holds good features.

  55. check over here

    Enjoyed looking at this, very good stuff, thankyou.

  56. description

    Everything is very open and very clear explanation of issues. was truly information. Your website is very useful. Thanks for sharing.

  57. our site

    Only wanna comment on few general things, The website layout is perfect, the content material is really great. "The reason there are two senators for each state is so that one can be the designated driver." by Jay Leno.

  58. look here

    This web site can be a walk-via for the entire information you needed about this and didn’t know who to ask. Glimpse here, and also you’ll positively uncover it.

  59. check my site

    I?¦ve been exploring for a bit for any high-quality articles or blog posts in this sort of area . Exploring in Yahoo I finally stumbled upon this site. Studying this information So i am satisfied to show that I have a very just right uncanny feeling I found out just what I needed. I such a lot without a doubt will make sure to don?¦t overlook this web site and provides it a look regularly.

  60. inside

    I like this website very much, Its a rattling nice post to read and find information. "...when you have eliminated the impossible, whatever remains, however improbable, must be the truth." by Conan Doyle.

  61. debit card

    Write more, thats all I have to say. Literally, it seems as though you relied on the video to make your point. You definitely know what youre talking about, why throw away your intelligence on just posting videos to your weblog when you could be giving us something informative to read?

  62. get more

    F*ckin’ remarkable things here. I am very glad to see your article. Thanks a lot and i'm looking forward to contact you. Will you please drop me a e-mail?

  63. waffentraining

    I’d should test with you here. Which is not something I normally do! I take pleasure in studying a post that may make individuals think. Additionally, thanks for allowing me to comment!

  64. this link

    you could have a great weblog here! would you wish to make some invite posts on my blog?

  65. like this

    Some really interesting details you have written.Assisted me a lot, just what I was looking for : D.

  66. child rage

    Simply want to say your article is as surprising. The clarity in your post is just great and i could assume you are an expert on this subject. Fine with your permission allow me to grab your feed to keep updated with forthcoming post. Thanks a million and please continue the rewarding work.

  67. best perfume for men

    There are certainly a whole lot of particulars like that to take into consideration. That is a great point to convey up. I supply the thoughts above as normal inspiration but clearly there are questions like the one you bring up the place crucial thing shall be working in honest good faith. I don?t know if greatest practices have emerged round things like that, however I am positive that your job is clearly recognized as a fair game. Each girls and boys really feel the impact of just a moment’s pleasure, for the remainder of their lives.

  68. follow this link

    Hi there, just turned into aware of your blog through Google, and located that it is really informative. I am going to be careful for brussels. I’ll be grateful in the event you proceed this in future. Numerous folks will likely be benefited from your writing. Cheers!

  69. see this website

    Hello there, You've done a fantastic job. I’ll certainly digg it and personally suggest to my friends. I am confident they will be benefited from this website.

  70. Bulksmsnigeria

    I believe you have remarked some very interesting points, regards for the post.

  71. Bulk SMS Service

    I went over this site and I conceive you have a lot of fantastic info , saved to favorites (:.

  72. How To Send Bulk SMS

    Sweet blog! I found it while surfing around on Yahoo News. Do you have any suggestions on how to get listed in Yahoo News? I've been trying for a while but I never seem to get there! Appreciate it

  73. How To Send Bulk SMS

    An interesting discussion is worth comment. I think that you should write more on this topic, it might not be a taboo subject but generally people are not enough to speak on such topics. To the next. Cheers

  74. get more info

    Hi I am so happy I found your website, I really found you by mistake, while I was looking on Aol for something else, Anyhow I am here now and would just like to say kudos for a fantastic post and a all round enjoyable blog (I also love the theme/design), I don’t have time to go through it all at the moment but I have bookmarked it and also added your RSS feeds, so when I have time I will be back to read much more, Please do keep up the awesome job.

  75. managed document solutions

    I believe this is among the so much significant information for me. And i am happy reading your article. But wanna commentary on some common things, The site style is great, the articles is really nice : D. Excellent task, cheers

  76. at this

    My coder is trying to persuade me to move to .net from PHP. I have always disliked the idea because of the expenses. But he's tryiong none the less. I've been using Movable-type on numerous websites for about a year and am worried about switching to another platform. I have heard fantastic things about blogengine.net. Is there a way I can import all my wordpress posts into it? Any help would be greatly appreciated!

  77. tron casino

    I am extremely impressed together with your writing skills and also with the format to your weblog. Is that this a paid subject matter or did you modify it your self? Either way stay up the nice high quality writing, it is rare to peer a nice weblog like this one today..

  78. Thank you for every other excellent article. The place else could anyone get that type of information in such an ideal manner of writing? I've a presentation subsequent week, and I'm on the search for such info.

  79. best investments

    You have noted very interesting details! ps decent site.

  80. blog link

    Hey there! Quick question that's totally off topic. Do you know how to make your site mobile friendly? My site looks weird when viewing from my iphone. I'm trying to find a template or plugin that might be able to correct this issue. If you have any suggestions, please share. Appreciate it!

  81. I discovered your blog site on google and check a few of your early posts. Continue to keep up the very good operate. I just additional up your RSS feed to my MSN News Reader. Seeking forward to reading more from you later on!…

Leave a comment

Your email address will not be published.