When The VIX Is Low, It’s Time To Go

Since the mini bear market/correction finished up at the end of 2018, the volatility index (VIX) has been smashed down. However, now that the VIX is low, it’s time to be cautious. I’ll explain why in a minute.

First, let’s take a look at the steep drop on the VIX chart. As the markets rallied 22% higher, volatility plummeted. Remember when the VIX sat in the mid-’30s on December 24? It’s now in the low teens in less than three months, a truly historic move. The VIX is back to the low levels from last summer and fall. During that time, complacency built up. As a result, the correction in December caught many off guards.

When the VIX is low…

For the most part, the market complies with the direction of volatility. Short pops in the VIX often mean brief and potentially scary dips in the markets. We saw that earlier this month. Take a look at the chart, and you will see that the VIX rose from 13 to 18 in about five sessions.

(Click on image to enlarge)


Just as the stock indices embark on a breakout move in price, the VIX indicates complacency. As I mentioned above, complacency means we will see a pop in volatility and a drop in prices. Are you ready for it?

We talk about buying protection, aka insurance, all the time. This is the time to do it. With low volatility, option puts are inexpensive. Plus, it’s better to be safe than sorry. Markets can correct at any time, and if you’re not prepared, it’ll hurt your portfolio. (With the markets up sharply, it’s not a bad idea to take some money off the table, too. Most pros are doing it. But that doesn’t mean you need to sell everything!)

The cost of buying some insurance for your portfolio is negligible. A SPY 280 put that expires next week was less $1 at the close on March 15. If you had strong gains last week, it would be a shame to give them up. I suggest looking at SPY, QQQ, IWM and DIA puts. If we’re wrong and the markets head higher, you didn’t pay through the nose for protection – but you did sleep well at night.

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Seth Golden 5 years ago Contributor's comment

Yes, those are the actions of fund managers and the like, portfolio protection. But historically, it's more a tax than a hedge, but utilized as you noted, for overnight comforting. Seems a misguided practice given the history of underperforming fund managers and the propensity for the markets to climb over time.

Bob Lang 5 years ago Contributor's comment

thanks Seth. like all insurance, it's a nuisance to pay for it but you're glad you have it when it's needed. like in December. we had stellar performance that month as the puts won out.

Seth Golden 5 years ago Contributor's comment

Understood! But I was shorting TVIX/UVXY through that event, which proved a more favorable and profitable strategy. Given the aforementioned and with a macro-focused outlook.

Bob Lang 5 years ago Contributor's comment

how do you know it was better than what we did, Seth? we banked 150%, 200% and some more multiple times during the month of December. I'm happy to share that with you via email, which was time-stamped. I respect others' approach and work but it's nice to have the same courtesy. I'm not in a contest to see who is better.

Seth Golden 5 years ago Contributor's comment

Yes, options can breed that kind of % return, but on a dollar basis is more my consideration. I don't see many strategies that would have delivered the short-VOL returns during the Oct-present period. Just don't see them? With respect certainly. And in kind, my alerts are actually public via Twitter, feel free. https://twitter.com/SethCL My comment and consideration was with respect to the hedging idea vs. shorting-VOL.

Bob Lang 5 years ago Contributor's comment

ahhh, i'm with you now. true on the hedging idea.

Seth Golden 5 years ago Contributor's comment

Up 8% is fantastic, no digs there. We were heavy cash and building positions through Q4

Bob Lang 5 years ago Contributor's comment

our results stand, we were up 8% for the year, the indices were much lower and negative. I'll stand by it. this year we are up 20% or so.