Close eye on VIX and SP500. Going long the VIX
Taking a close look at the behavior of the VIX alongside the S&P 500 has shown me some opportunities to aim for. In particular, when the S&P is posting new all-time highs, looking for the VIX to reach its lower bound. Since the start of the pandemic, the VIX barely kissed the 14 mark a couple months ago and since then, it has stayed above the 16 handle with a quick peak at 15.20 two weeks ago, prior to the small pullback in equities which subsequently would have been a good time to be long VIX as it gapped higher to start the week and subsequently turn around at the 25 handle.
What I have found interesting to work with is finding an entry point when the following conditions apply:
- S&P at ATH's
- VIX at lower bound for a couple of days at least
- a week or two since last pullback in stocks.
It is clear that the VIX spikes when stocks falter and sentiment is risk-off. This happens quite immediately and can often pre-meditate a pullback in stocks as the index is a reflection of the forward-anticipated volatility of the S&P 500. Consequently, it also takes longer to come back down to its lower bound than it does for stocks to reach their ATH's again. As the volatility in markets tends to diminish at all time highs for a shorter period of time, then the VIX has a chance to reach its lows.
These are the moments that I am looking out for. In this chart, I am looking to see the VIX touch the 16 handle at which point I can look to go long.
WHERE AND HOW TO GO LONG VIX?
There are a few ways to do this. Professionals get their exposure through options on the CBOE, as a hedge against a drop in equities. For mere mortals with more limited access you have two options: VIX ETFs or CFDs. I choose the latter.
It is important to note that the VIX CFDs are priced differently and don't coincide exactly with the CBOE VIX chart. However one can use it the same way. When the CBOE VIX meets the criteria, once goes to the CFD and looks for long exposure. A good objective is to place a 1 point stop and a 2 point limit and look for it to run depending on market conditions. The spread is elevated and will cost some $$ at the opening of the position, but the reward from a slight pullback in stocks is noticeable as you can see from this chart
Rinse and repeat. One can take it a step further and look to go long the S&P 500 once exited the long VIX trade, and ride it until new ATHs.
What I have found interesting to work with is finding an entry point when the following conditions apply:
- S&P at ATH's
- VIX at lower bound for a couple of days at least
- a week or two since last pullback in stocks.
It is clear that the VIX spikes when stocks falter and sentiment is risk-off. This happens quite immediately and can often pre-meditate a pullback in stocks as the index is a reflection of the forward-anticipated volatility of the S&P 500. Consequently, it also takes longer to come back down to its lower bound than it does for stocks to reach their ATH's again. As the volatility in markets tends to diminish at all time highs for a shorter period of time, then the VIX has a chance to reach its lows.
These are the moments that I am looking out for. In this chart, I am looking to see the VIX touch the 16 handle at which point I can look to go long.
WHERE AND HOW TO GO LONG VIX?
There are a few ways to do this. Professionals get their exposure through options on the CBOE, as a hedge against a drop in equities. For mere mortals with more limited access you have two options: VIX ETFs or CFDs. I choose the latter.
It is important to note that the VIX CFDs are priced differently and don't coincide exactly with the CBOE VIX chart. However one can use it the same way. When the CBOE VIX meets the criteria, once goes to the CFD and looks for long exposure. A good objective is to place a 1 point stop and a 2 point limit and look for it to run depending on market conditions. The spread is elevated and will cost some $$ at the opening of the position, but the reward from a slight pullback in stocks is noticeable as you can see from this chart
Rinse and repeat. One can take it a step further and look to go long the S&P 500 once exited the long VIX trade, and ride it until new ATHs.
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