The recent rally in global equity markets and a sense of relief created by coordinated actions of central banks have created a sense of complacency amongst investors. Bullish sentiment is also above historical averages despite risks of debt crises in Europe, the US, and Japan along with significant slowdowns in China and India. As a result, the VIX has hit multi-year support at 14.54 on Friday and is currently not trading much higher at 15.04. Similar lows in volatility have not been broken since 2007 (and the 1990s before then) the VIX breaking below fifteen has been quickly been followed by sell offs and increased volatility. I recommend buying the VIX at these levels, because technicals indicate a limited downside of a few percent and fundamentally investors have ignored the structural problems in the global economy. One inkling of bad news or a below expectations manufacturing or jobs’ Friday number will likely send the market back into a downtrend panic.
One Year VIX
The way for investors to capitalize off of complacency is by buying calls on either the VIX or iPath ETNs correlated to VIX futures (VXX for short term futures, VXZ for medium term). As a warning, VXX does not perfectly reflect the movement of the VIX, but VXX and VXZ are the best ETNs available for investors to profit off on increasing volatility. I also recommend traders using the VXX to place a stop somewhere between 19.25-19.80 to protect yourself from an economic “Goldilocks scenario” that can drive the VIX down to the 12-13 range.
Source: Nicholas Pardini