Considering the many wild events that are happening worldwide, the Middle East/North African struggle for democracy, and the natural earthquake and tsunami, and now with the nuclear troubles in Japan, the markets are all roiled up. This means that with all the volatility, the unknowns and previously unpredictable events, investors do not know what will happen in the future and are therefore understandably more cautious and edgy.
This results in the options on the S&P500 having wide spreads, which is measured in a volatility index known as the VIX. A recent chart for the VIX Index follows:
(click to enlarge)
A glance at the above chart shows the recent spike on March 16th shooting upwards as the regular markets fell. Volatility is peaking; on Thursday the peak may have passed, but this peak is rather unusual considering the gradual downwards trend prior to the fall. Is there a trade in the making for the revision to the mean?
Yes, there is an unusual trade for the more adventurous to consider. Now, I believe the worse is behind us, and a bet on a return to business as usual may be in order, as all the market disturbing news should now be priced into the market. Is there a way to short the VIX in an ETF?
A search led to the writings of a blogger on sixfigureinvesting.com (catchy name). This sixfigure author recommends that the best and easiest way to play the opposite of this VIX volatility is the reverse ETN, XIV.
A recent graph for the XIV ETN follows:
(click to enlarge)
Note that the recent spike upwards on the VIX chart is now represented by a spike downwards on the XIV, as this is an inverse ETF. Note also that the volatility may have peaked and has subsided somewhat, as Thursday was green. This may make this bet more secure, as the overall general markets on March 17th were moving back to green (St. Patrick's Day).
The chart action of the VIX moves in an opposite manner to the rise and fall of the S&P500 in that the S&P climbs slowly and drops steeply; the VIX rises abruptly, and drops slowly. Therefore, XIV being the inverse of the VIX has similar but opposite price action - it drops sharply, and will rise slowly.
For this trade, the author is looking for the markets to calm down and the volatility to reduce; I am looking for a slow rise in XIV over the next 4 to 6 weeks back to around the $150 level as the market fears subside. Presently, the XIV is at about $115, giving a possible 30% gain.
Disclosure: I am long XIV.