The Cboe Volatility Index rocketed to its loftiest since 2008 on Monday as a plunge in oil prices upset traders already on edge over the coronavirus.
After a hiatus as markets climbed ever higher, beginning in mid-February, volatility once again exploded, with the CBOE Volatility Index (VIX), known as the “fear index,” running up from 13.35 to 49, nearly quadrupling in just two weeks, as stocks are on track for their most precipitous fall since 2008. The coronavirus is a critical catalyst that has put fear into markets, although coiled volatility or compression often leads to a dramatic selloff.
Now the VIX is reaching epic levels, spiking over 62 Monday, as investors panic over futures markets being locked limit down in overnight trading on Sunday, the coronavirus, and oil crashing to nearly $27 a barrel.
“The VIX follows some very specific patterns that show compression,” Henrich said last year on CNBC’s “Trading Nation.” “If you look back to, let’s say, the last few years, we’ve seen a large compression pattern from 2016 to 2017.”
“When that energy compresses too much, then we see these spikes,” the strategist said. “We have seen these spikes with quite a bit of regularity, but they always need some sort of trigger.”
Although this volatility can present significant investment risk, when correctly harnessed, it can also generate stable returns for shrewd investors.
Investors looking to use ETFs to trade the VIX over the short term can look at the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) which is up over 25% on Monday, or the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY), which also advanced more than 31%, along with the run in the CBOE Volatility Index. Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.
If volatility does start to compress, investing in stocks once again using time-tested ETFs like the SPDR S&P 500 ETF Trust (SPY), the SPDR Dow Jones Industrial Average ETF (DIA), and the Invesco QQQ Trust (QQQ) is a straightforward way to play the long side.
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