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Time To Buy Volatility Again?

by John Rubino on June 26, 2012 · 2 comments

In market parlance, volatility is another word for fear. That’s why a volatility index like the S&P 500 VIX Short-Term Futures — aka the VIX — rises when stocks fall but falls when stocks spike.

Lately, the VIX has been sending an all-clear signal by gradually falling. It’s not at record lows, but it is trending that way, implying that we’re headed for a relatively tranquil period with a positive bias in stock prices.

To which a rational observer might respond: “Greece, Spain, Italy, California, Illinois, Iran, Syria…”. Today’s world is anything but stable and positively-biased, so maybe it’s time to once again bet on a return of fear and downside volatility.

One popular vehicle for this kind of speculation is VXX, the iPath S&P 500 VIX Short-Term Futures ETN. It’s down big lately, and, fitting for a volatility play, is hugely volatile itself, moving by double-digit percentages on big market days. Let any of the above landmines blow up and VXX will soar.

But be aware that this ETN is strictly for short-term gambling. It invests in VIX futures contracts and lets them run off, and since futures one or two months out tend to be higher than a given commodity’s spot price, VXX is constantly losing intrinsic value. Buying and holding this security will take you to zero in a few years, no matter what the market does in the meantime.

But for a three-month speculation or a short-term hedge on a long stock portfolio, it’s not bad. Speculators who bought it at last July’s lows nearly tripled their money by October.

 

  • Bruce C.

    These days I’m never comfortable when I’m not holding “short positions” on the stock market because reality can take hold at any time. The run up in mid-june before the Greek election and the Fed meeting may have been the last blast of hope for a while now. The insolubility and deflationary inevitability of the euro zone, along with the economic slow down around the rest of the world should start to really sink in after the the EU summit this week ends the same way the previous 20 have. Maybe there will be a pop if the US Supreme Court rejects “ObamaCare” so keep some powder dry, but then watch out.

    I think both the Fed and the ECB see things the same way: The deflationary forces are too big to stop through monetary policy, especially without complementary fiscal policy, and whatever can be done at this point will be very destructive at best and a catastrophic failure at worst. That means they (both the CBs and the politicians) need political cover – they need “the people” to demand that they do something (and they’ve been told “money printing” will do it). Therefore, I think they will need to “engineer” a crisis – basically by doing nothing/letting-the-”free-market” handle it. To me that means the S&P has to drop below 1200 or so and Europe (or Greece at least) has to experience serious bank runs that the media can’t ignore.

    I’m on the fence about the fate of my gold mining shares. I suspect gold will hold at the low 1500’s and could even rally along with the miners if enough investors figure things out in time, but that’s a dicey bet.

  • paper is poverty

    Today (6/29) would be the perfect time… VXX has been slammed by the latest Euro band-aid, but these risk-on rallies get shorter and shorter with every new “solution” proposed.


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