It's Time to Buy Volatility
For the first time in over four months, options, or implied volatility, is inexpensive and represents a buying opportunity.
But we do not want to use the VIX, or its related products such as ETFs or ETNs like iPath S&P 500 VIX Futures (NYSEARCA:VXX) or leveraged products like Velocity Shares 2x VIX (NYSEARCA:TVIX) as the vehicle. Instead we will go right to the source: the SPDR Trust (NYSEARCA:SPY) options.
I’ll get to the strategy in a bit, but first I want to define volatility and the VIX and give some reasons why I think it is “cheap” right now.
The first and foremost thing to keep in mind when looking at the VIX is that it is a statistic, and as such it tends to revert to the mean. While demand can drive values higher, keep in mind there is unlimited supply of the options contracts upon which the VIX is based. This pricing, or short-term implied volatility levels, is based mostly on short term perception of risk rather than on some long term fundamentals.
The biggest misconception and misuse of the VIX is that implied volatility is a distinct asset class that can be traded or used to hedge a portfolio. It is not predictive, only reflective of current conditions. Let’s take a look at exactly how the VIX is calculated.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.