Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Central Bank Time Machine - 23rd Aug 19
Stock Market August Breakdown Prediction and Analysis - 23rd Aug 19
U.S. To “Drown The World” In Oil - 23rd Aug 19
Modern Monetary Theory Could Destroy America - 23rd Aug 19
Seven Key Words That Explain "Stupidly High" Bond Market Prices - 23rd Aug 19
Is the Fed Too Late Prevent A US Housing Bear Market? - 23rd Aug 19
Manchester Airport FREE Drop Off Area Service at JetParks 1 - Video - 23rd Aug 19
Gold Price Trend Validation - 22nd Aug 19
Economist Lays Out the Next Step to Wonderland for the Fed - 22nd Aug 19
GCSE Exam Results Day Shock! How to Get 9 A*'s Grade 9's in England and Maths - 22nd Aug 19
KEY WEEK FOR US MARKETS, GOLD, AND OIL - Audio Analysis - 22nd Aug 19
USD/JPY, USD/CHF, GBP/USD Currency Pairs to Watch Prior to FOMC Minutes and Jackson Hole - 22nd Aug 19
Fed Too Late To Prevent US Real Estate Market Crash? - 22nd Aug 19
Retail Sector Isn’t Dead. It’s Growing and Pays 6%+ Dividends - 22nd Aug 19
FREE Access EWI's Financial Market Forecasting Service - 22nd Aug 19
Benefits of Acrobits Softphone - 22nd Aug 19
How to Protect Your Site from Bots & Spam? - 21st Aug 19
Fed Too Late To Prevent A US Housing Market Crash? - 21st Aug 19
Gold and the Cracks in the U.S., Japan and Germany’s Economic Data - 21st Aug 19
The Gold Rush of 2019 - 21st Aug 19
How to Play Interest Rates in US Real Estate - 21st Aug 19
Stocks Likely to Breakout Instead of Gold - 21st Aug 19
Top 6 Tips to Attract Followers On SoundCloud - 21st Aug 19
WAYS TO SECURE YOUR FINANCIAL FUTURE - 21st Aug 19
Holiday Nightmares - Your Caravan is Missing! - 21st Aug 19
UK House Building and House Prices Trend Forecast - 20th Aug 19
The Next Stock Market Breakdown And The Setup - 20th Aug 19
5 Ways to Save by Using a Mortgage Broker - 20th Aug 19
Is This Time Different? Predictive Power of the Yield Curve and Gold - 19th Aug 19
New Dawn for the iGaming Industry in the United States - 19th Aug 19
Gold Set to Correct but Internals Remain Bullish - 19th Aug 19
Stock Market Correction Continues - 19th Aug 19
The Number One Gold Stock Of 2019 - 19th Aug 19
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
GOLD BULL RUN TREND ANALYSIS - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19

Market Oracle FREE Newsletter

The No 1 Gold Stock for 2019

How to Trade the VIX: Using the "Fear Gauge" to Hedge Down Stock Markets

Stock-Markets / Stock Index Trading May 10, 2012 - 12:41 PM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleDon Miller writes: If you don't know already, it's time to learn something all serious investors should know: how to trade the VIX Indicator (VIX).

While most investors are scrambling to figure out whether the market is headed up or down, savvy pros use the VIX both as means of protection and a source of profit.


In fact, Money Morning Capital Waves Strategist Shah Gilani last week alerted his Capital Wave Forecast subscribers to a VIX trade that would add some protection to their portfolios.

"Call me a Nervous Nellie, if you like," said Gilani, "but I'd rather lose out on a hedge than get killed because I didn't have one on when the proverbial shot hit its mark."

That's why knowing how to trade the VIX is so essential.

But before we get into how to trade the VIX, we need to understand what the VIX actually is.

What the VIX Indicator Measures
Most investors think of the VIX simply as a "fear gauge."

But contrary to what most people think, the VIX doesn't measure actual stock market volatility.

In fact, experts view the VIX as possibly one of the best contrarian indicators in the business.

You see, the VIX tracks the trading in options on the S&P 500 to indicate how investors expect the market to move over the next 30 days.

For example, as investors buy more put options, they get more expensive and the VIX goes higher. Conversely, the reverse is also true: when investors sell options, they become cheaper and the VIX begins to fall.

The VIX then, is really a reflection of the price of calls and puts on the S&P 500.

It is quoted in percentage points and roughly translates to the expected annualized movement in the S&P 500 over the next 30 days. A VIX reading of 15 implies the S&P could swing higher or lower by 15% over the next 12 months, or about 4.33% over the next 30 days.

As a contrarian indicator, the VIX usually has an inverse relationship with the markets. When the market is rallying the VIX tends to drop; when the market is tanking the VIX tends to rise.

The scarier the broad market decline the higher the VIX tends to go - hence its reputation as the "fear gauge." In fact, during the worst part of the 2008/2009 bear market the VIX soared as high as 80.

In today's markets, however, a VIX reading greater than 30 is generally associated with a large amount of volatility and uncertainty, while values below 20 generally reflect less stressful times.

The VIX in Action
When the VIX fell as low as 16.6 on July 6 last year, Gilani warned investors to protect themselves against potential volatility.

"The low VIX creates an excellent opportunity for you to buy put protection at reasonable prices," Gilani said. "In the face of future unknowns, and as long as implied volatility is low, you should take advantage of cheap puts to add some portfolio protection ... just in case.

Exactly two days later the VIX began a relentless climb. Investors who heeded his advice were glad they did.

The VIX jumped to 48 and remained above 40 throughout October as the S&P 500 tumbled to a yearly low of around 1,100.

Meanwhile, Gilani had also advised his Capital Wave Forecast subscribers to hedge with put options in May and June.

On Aug. 8-- the day the Dow Jones Industrial Average plunged 635 points -- subscribers to Capital Wave Forecast locked in gains of 456%, 455%, 371%, and 197% on four of those holdings.

How to Trade the VIX
There are a few different options for investors who want to know how to trade the VIX.

If you believe that market volatility will surge, you can buy VIX call options (the right to buy) or puts (the right to sell).

Another approach would be to trade VIX futures-based exchange-traded notes (ETN) and exchange-traded funds (ETF), including the iPath S&P 500 VIX Short-Term Futures ETN (NYSE: VXX) and S&P 500 VIX Mid-Term Futures ETN (NYSE: VXZ).

Because they are cheap to own and trade, they make for a fairly good, simple alternative for investors looking to hedge their risks and protect their profits.

But you don't have to trade the VIX directly to make money on it. Most often, the movements in the VIX are inversely correlated to the S&P 500 and the market in general.

That means trading S&P 500-based products with plenty of liquidity.

When the VIX is high you can buy the S&P 500 SPDR (NYSE: SPY), including futures and options.

Or you can consider a number of leveraged inverse ETFs, including the ProShares UltraPro S&P 500 (NYSE: UPRO) and the ProShares UltraShort S&P 500 (NYSE: SDS) when the VIX falls below 20.

Investors who want to trade the VIX should keep in mind that VIX-linked products are short-term trading tools for active traders who know the risks. That's why it never hurts to have the help of an experienced Wall Street professional.

Gilani said more VIX trades might be needed in the months ahead.

"If what's going on now keeps on going, we're going to have to add a lot more protection," said Gilani. "My hope is that this is a shorter-term panic selloff caused by profit-taking. That's how it starts, sometimes. But if it escalates it's going to be a long, hot, and sweaty summer."

To stay up-to-date with Gilani's market insight, just click here to learn more about the Capital Wave Forecast.

And now that you know how to trade the VIX, keep an eye on it. It's one of the best contrarian indicators in the markets.

Source :http://moneymorning.com/2012/05/10/how-to-trade-the-vix-using-the-fear-gauge-to-hedge-down-markets/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules