Courtesy of John Rubino.
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.
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