HedgeFundLIVE.com — The Volatility Index is sitting near a support level after Fridays close. The level has been 18 for the last few months. If the S&P breaks higher today or tomorrow watch for the VIX to move towards the 15 level. It’s also possible that the VIX will remain elevated even if the market moves higher due to an increase in demand for option insurance by investors. Recent world events, the so-called Black Swan events, have caused an unease in the markets which results with options becoming more expensive.
Any one who has ever looked at volatility and trades it knows one thing to be true, low volatility only goes to high volatility, and vice-versa. There are no other paths, and it tends to jump back and forth violently. A simple way to play this is opening a straddle using options or futures (VXX). Holding the position won’t necessarily hurt you either, make sure to plan for time-decay, but the VIX will spike up sooner or later. On a technical note, there is a nice hammer candle from Friday, which may represent a reversal coming to the recent downtrend.
If the VIX does keep breaking to the downside further, look for a new strong bull run in the overall S&P market. A likely scenario is that the VIX moves sideways for a week or more, due to the current elevated price of options insurance; it’s important to remember that the VIX only correlates with the S&P about 75% of the time.
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