Use Volatility to Profit
If you’ve ever walked a dog, you know about the zigzag path they take down a sidewalk.
You can’t blame them.
There are just too many great odors to sniff on both sides of the path.
So your pooch will veer far to the left, take a few deep whiffs, lose interest and veer off to the right to check out what other olfactory surprises their daily walk has in store.
Funnily enough, human psychology — when it comes to investing — isn’t much different.
Investor sentiment swings from extreme euphoria to anxiety, from extreme fear to extreme greed.
And like dogs on a walk, investors swing from the far, far left and then veer back far, far to the right. In this case, however, Wall Street is the sidewalk.
How can we use this knowledge to profit from those ever-changing human emotions?
Well, it all starts with the CBOE Volatility Index, more commonly known as the VIX.
“Be Fearful When Others Are Greedy” — Warren Buffett
The VIX — often referred to as Wall Street’s fear gauge — was created in 1993 and investors have been using it to hedge against the possibility of severe market declines ever since.
The VIX is very useful in helping spot major stock market turning points.
As the above chart shows, the VIX has historically spiked after major investment calamities, such as the 2008 financial crisis and the dot-com bubble in 2000.
Conversely, the VIX has plunged to extremely low readings (in the “teens,” as measured by the VIX) at major stock market tops.
You see, when the stock market is on fire, investors lose all their fear and dog-pile into the stock market.
Whenever the VIX falls into the teens, it’s one of the most dangerous times to be in the market and one of the most rewarding times to invest in the VIX.
Where is the VIX today?
The VIX is well below the levels seen at the time of the 2008 crash, when the index jumped as high as 80. Right now the VIX is floating in the midteens.
If you’re concerned about the stock market making a dangerous top, now would be a good time to consider hedging your stock market bets with the VIX.
Here’s how to do it.
Portfolio Insurance Made Easy
If you want to invest in the VIX, these are the two most popular liquid ETFs to consider:
- IPath Series B S&P 500 VIX Short-Term Futures ETN (VXX)
- ProShares VIX Short-Term Futures ETF (VIXY).
These ETFs are very volatile, moving both up and down, so they aren’t appropriate for conservative investors.
However, with the VIX index now in the teens, these ETFs are in the sweet spot for producing the BIG rewards for investors right now.
They are also an excellent way to protect your portfolio from a severe stock market decline.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch