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Profiting From The VIX Fear Index!

|Includes:TVIX, VIXY, iPath S&P 500 VIX Short-Term Futures ETN (VXX), XIV

The VIX Index tracks the premium prices of near-term out of the money put and call options on the S&P500 Index. As the implied volatility of these options rises, and thus the premium options traders are willing to pay for these "insurance" positions, so does VIX. As I.V. falls, VIX falls. Thus the VIX gives us a very good read on the near-term forward expectation of the markets regarding volatility. A rising VIX means a rising expectancy of higher volatility, which normally means falling stock prices.

The VIX has been rising sharply for several weeks now on fears of Russia's invasion of the Ukraine, on increasing tension in Iraq and Gaza, and on the prospect of rising interest rates here at home. But it may have reached an unsustainable height. If so, this provides us with a very profitable opportunity. One can trade the VIX Index directly through the use of options on the index. I prefer to use one of two ETF's: VXX which tracks the Index, and XIV which is the inverse of the index.

I'm currently Watching this sharp wedge on VXX develop. I have a few VXX puts on, but may add more into the close of today's trading if this downside pressure (a falling VIX) holds into the close. If traders are willing to release the pressure valve on the "fear index" into the weekend, that tells me that whatever news may come on the geopolitical front, the markets are not that worried about it. I also just bought some XIV (options are not available on this ETF) which does the same thing as my VXX puts. VIX is likely to trade sideways or down, but upside is limited from here.

Please click on the chart below. You will see VXX trading somewhere around $34.50 per share at the time of this writing. It has run up into a falling major moving average and has stalled up upward progress. The wedge rises at about a 60-degree angle; anything over 45-degrees is unsustainable. RSI is overbought and showing some weakening. This may develop into a bull flag breakout, in which case a prudent stop is just over the recent range of intraday highs if you are short shares of VXX (or under recent lows if you buy XIV). $30.00 is a reasonable near-term target, for about 15% gain in shares of VXX/XIV, or 60%+ on VXX puts.

Happy trading!


Disclosure: The author is long XIV.