BY: HANS ALBRECHT, CIM®, FCSI, VICE-PRESIDENT, PORTFOLIO MANAGER AND OPTIONS STRATEGIST, HORIZONS ETFS
March 6, 2017
I’ve been asked on many occasions whether or not I can truly chart the VIX (also known as ‘the fear index’). Of course I can; the VIX takes a fairly good rolling snapshot of investor sentiment and behaviour. As we know, behaviour tends to repeat itself over time.
Despite recent questionable arguments as to how useful it is given low market correlation, the VIX still reflects the collective mood out there. Sure, it shows a percentage and is also a mean reverting mechanism, but the VIX does indeed tell a chartable story. For example, we saw a large breakdown in markets immediately following Donald Trump’s election win, and the aftermath wasn’t pretty for holders of insurance – realized volatility (actual market movement) these past few months has been shockingly low, dragging down option pricing with it.
However, I do like to pay particular attention when the VIX perks up despite a strong market. Lately, investors have been only slightly worried, putting a floor in VIX and VIX futures. Fear levels pulled back slightly on Trump’s well-received address to Congress on February 28th, but U.S. valuations, the upcoming European elections and the pace of rate-hike uncertainty should see the cost of insurance hang in there. I’m aiming to take advantage of spikes to the VIX 15-17 range to short volatility by buying a product like HVI.
One-year chart of VIX
Source: Thomson Reuters, as at March 1, 2017
One-year chart of SPY
Source: Thomson Reuters, as at March 1, 2017
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