For us traders, volatility is a constant shadow, looming over our trades. Some traders fear it, others understand it can be a valuable tool for creating profits, but none ignores it.
However, only the seasoned vets of the trading world know this piece of advice - volatility can be used to hedge your investments.
Enter the Fear Index.
The CBOE Volatility Index, more commonly referred to as VIX or the Fear Index, represents one measure of the market's expectation of stock market volatility over the next 30-day period.
The VIX is quoted in percentage points and translates, roughly, to the expected movement in the S&P 500 index over the upcoming 30-day period, which is then annualized.
Put simply, the higher the market's implied estimation of volatility is, the higher the VIX would be.
It is no secret that, geopolitically speaking, the world today is a very volatile place - Europe experiences a huge tremor, with the aftershock of the 2008 crisis, the collapse of Greece, the Russian occupation of the Crimean peninsula and the wave of refugees from Africa and the war-torn middle east flooding the EU.
Recent epidemics such as the Ebola or the Zika virus, the bloody, ongoing civial war in Syria, Shiia-Suni conflict raging all across the Middle East (with proxy wars fought in Yemen, Lebanon etc.), the increasing effect ISIS has on world politics... The lost goes on, with numerous reasons for unstablity.
Of course, all of these factors reverberate in the market. This leads to an uncreasing feeling of uncertainity for many traders.
Now, remember - and I emphasis this because this is a common mistake many traders make - the VIX does NOT represent actual instability, but rather the perceived and implied instability of the market.
In a time like this, when the only ceratin thing is uncertainity, the VIX is bound to respond.
A statement by Goldman Sachs (N:GS) warns that the VIX is not going to calm down and settle back into the low teens like it was from 2013 to mid-August 2015. New normal trend VIX levels should now be 4-5 points higher than the average level of 14 experienced in 2013-2014 given the current state of the economy.
In the last weeks we had some nice peaks - by December 21th 2015 the VIX stood at 15.7. A mere 2 weeks later, by Januray 4th 2016, it climbed to 27.1 - almost 75%.
There are a few different instruments and products that offer you different ways to trade the VIX (namely, the N:VXZ and O:TVIX for traders who believe volatility will grow, or the XVV and O:XIV for the opposite trend), but it is usually safer and more profitable to trade of actual VIX futures and/or options.
Short term traders should count on the recent volatility of the VIX, wait for a relative down point (anything below 20 will do) and ride it up to around 25. Don't wait longer than that, as trying to hit anything above is a bit risky.
Long term traders, however, can safetly bet on the VIX touching the 28-28.5 mark in the next weeks.