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In Defense of the VIX

volatility.jpg 

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

vol1.png

Source: Thomson Reuters, as at March 1, 2017

One-year chart of SPY

vol2.png

Source: Thomson Reuters, as at March 1, 2017

The views/opinions expressed herein may not necessarily be the views of AlphaPro Management Inc. All comments, opinions and views expressed are of a general nature and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors.

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