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Do You Own the Ultimate Hedge Against Political Chaos?

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Over the past month, the VIX has surged 25% while the S&P 500 has remained flat.

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With Congress stuck in a political deadlock, the US government still partially closed, and the nation on the verge of a possible debt default, what's been the one asset that's proven to be the single best hedge?

While most Wall Street pundits were dismissing the significance of stock market volatility, we told our readers that owning volatility or the CBOE S&P 500 Volatility Index VIX (INDEXCBOE:VIX), was an ideal way to capitalize on the chaotic state of affairs. And since then, the VIX has effortlessly outperformed virtually all other investments.

Over the past month, the VIX has surged 25% while the S&P 500 (INDEXSP:.INX) has remained flat. Interestingly, gold (NYSEARCA:GLD) even managed to lose 2%, which shows its hedging ability against political mayhem has badly failed.

In October, just days ahead of the latest volatility pop, we wrote:

Since the end of last year, the VIX has experienced a price jump nearly every two months and as we've consistently noted, the S&P 500 has been making new highs, yet the VIX hasn't bottomed. This is a rather large discrepancy and the previous times stocks have made new highs without the VIX hitting new all-time lows, it warned of a short term market top. We think hedging volatility still makes sense and we're buying the DEC 2013 VIX call options at $540.

The first leg of our VIX trade resulted in a 46% gain when we sold our December call options at $790. That's not a typo, nor is it an unusual return for us. From May 24 to June 20, we rode a similar surge in stock market volatility, bagging an 84% gain on VIX related trades.



Despite the inability of Washington, DC, to come up with a piecemeal deal, the Congressional Budget Office says the US Treasury has enough cash flow to cover expenses and to avoid a debt default through Oct. 22.

In the meantime, owning the VIX has been among the single best ways to profit from the political stalemate.

Editor's note: This story by Ron DeLegge originally appeared on ETFguide.com.

To read more from ETFguide, see:

Is More Pain Ahead for Gold Investors?

Can Stock Market Volatility Stay Tame?

One Way to Get More Income From Your Portfolio
No positions in stocks mentioned.
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