Guys, I’ve been talking about it here in Joy of the Trade recently and it bears repeating: Volatility is coming. And there’s nothing the Federal Reserve or anyone can do about it. Hell, it’s mostly the Fed’s fault!
Where many see scary spikes in volatility, I see opportunities… BIG, round-trip trade opportunities… Because volatility can be traded just like a stock.
And there’s a special weapon every trader needs in their toolkit when volatility ramps up… or down for that matter…
The CBOE Volatility Index (VIX) is also known as the “fear gauge,” but there’s nothing to fear when trading it with me!
The VIX tracks the prices of options on the S&P 500 in real time. It’s designed to reflect a consensus view of expected volatility over the next 30 days. The more stocks are expected to move over the next 30 days, the higher the reading on the VIX.
In the most basic terms, a VIX level of 20 is considered average volatility… about a 1% move up or down each day — which happens about 70% of the time. The further below 20 the number falls, the less volatility expected… The higher the reading, the more expected volatility.
For my number nerds out there, this is how it’s calculated…
From a trading perspective, big opportunities need big moves. And the fast-money guys on Wall Street know this, so they built an exchange-traded note that attempts to track the moves of the VIX — more on that ETN later… This constant movement gives us the chance to play both sides, up and down — a “Round Trip” trade!
When there are money-making opportunities to the upside, there can be even more explosive gains to the downside…
I’m talking about double- and triple-digit opportunities, as you can see below, in a matter of days. And these moves come one after another… after another… after another — because like I said, there’s an ETN that was built to track these massive VIX moves!
Here’s a chart of the VIX over the past five years. Everyone can probably guess what that mammoth spike was at the beginning of 2020…
It was of course the beginning of the pandemic, and the ensuing market crash sent the VIX from around 15 to over 85! No, those types of moves don’t happen all the time… But we don’t need moves like that to make double- and triple-digit gains on simple call and put options.
How I Round-Trip Trade the VIX
As I said, volatility is coming. In fact, it’s about to explode worldwide. And I don’t hear traditional financial media talk about it nearly enough. Even though it’s cyclical, especially at certain times of the year — like right now in the fall.
Back to the chart above and my “Round Trip” trading philosophy…
Each rise and subsequent fall in volatility is a chance to make money. And back in the day, the VIX was an instrument only a select few lucky people in Chicago could trade, or those with prime brokerage accounts at Goldman Sachs like my hedge fund.
But these days, it’s something anyone can buy and sell just like stocks… and it trades like water flows… I’m talking about 30 million shares a day in average volume.
And that’s the Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (BATS: VXX).
Yes, that’s a mouthful… But the important thing to remember is it’s the VXX, an ETN, and it makes big, BIG moves. And what did I say about big moves?
That’s right… BIG moves mean BIG opportunities!
Looking at some of the standout daily moves like back in July, it went from $28 to $37 in less than 24 hours… That’s a 32% move in the underlying in a day!
Like I said, there’s massive volume trading this ETN — and there are more and more people in it every day. The more liquidity and volume there is, the easier it is to trade in and out of positions.
And if you take a look at the option chain and its open interest, it’s a trader’s dream…
Massive volume trading in tight spreads, which means you don’t have to pay up to enter positions. And I’ve devised a strategy that allows us to trade these round-trip trading moves, cashing in on both the up and downsides!
Volatility is coming…
Who’s ready to exploit it with me? LFG!
Joy of the Trade