It’s Almost Time To Buy Volatility


Volatility has been remarkably low a long time.

The number of days without a 5% correction is close to setting a record.

Volatility could return very soon for several reasons.

I read a lot so you don’t have to.

Sell VXX puts to generate income with your cash and a potential great buy-in price on the long volatility ETF.

Volatility has been low for a very long time. I always flinch a little when I hear radio talk show hosts, folks on TV or investors talk about how volatile markets are. That’s a clear sign they just have no idea what they are talking about. 


VIX VolatilityAnother thing I flinch about, is how people are newly putting money into investments they know nothing about just because prices are rising. What happens when direction changes? How much and how fast does the money come out next time? I’m guessing pretty fast, and as usual, last in, last out. Lambs to the slaughter.

If my forecast is right, then at a minimum, volatility will rise this year. That doesn’t mean we’ll see a crash in the stock market, just that prices will move around more, some down weeks to go along with the up weeks. It has been over 381 days since the last 5% correction. 

5% CorrectionsBusiness Insider

Below are a number of reasons that volatility could return and a couple trades to capitalize on the idea. As always, I avoid leveraged ETFs because of the daily reset deterioration. Options are a much better choice for playing changes of direction in my opinion.

3 Reasons Volatility Could Rise

The first and easiest reason volatility could go up is that it can’t go do forever. We’re near record lows on volatility and while we could keep seeking records for a while, at some point, something happens to inject some jitters – at least you’d think. I’m not going to count this reason, so here are actual three reasons that could reverse the trend in falling volatility. 

  • The Iran war that I was so ridiculed for suggesting could happen several months ago appears to at least be on the verge of happening. As I type, there have been protests for over a week in Iran and protesters have been fired upon. French President Emmanuel Macron has now accused the U.S., Israel and Saudi Arabia of fanning the flames of war – as I suggested would happen in the article linked above. If war breaks out within or with Iran, or both, volatility could spike as oil supplies are threatened. 
  • Earnings season is coming again and expectations are high. What if companies can not keep up with the torrid pace of last year and the heightened expectations? That would likely trigger more volatility. 
  • The new Fed Chairman is an unkown. I do not put it past a Trump appointee so say something that is unexpected. Yes, I know, perish the thought that something weird comes out of this administration. Oh yeah, don’t forget that the Fed balance sheet is scheduled to get tighter and tighter, meaning at some point, that matters.
  • Pick a “Black Swan,” any “Black Swan.” We haven’t seen one in a while, but we know they’re around. Ok, I won’t count this one either. Whoever heard of something unexpected happening?

Option Trades For Now and Later

The first trade to capitalize on volatility is to simply sell cash-secured puts on the iPath S&P 500 VIX ST Futures ETN (VXX). With not only the price, but actual measured volatility sitting at record lows, selling puts is a way to capture premium and if the contract is put to you, then you have a very cheap asset to hold for a month or two. 

Sell VXX February $25 puts for about $1.50. When entering the trade, ask for the “ask” price. Then over an hour or so, lower to the big price, which will get filled. If you get a $1.50, that yields a 6% return on your cash in about 6 weeks – not bad.

If the put gets put to you and you end of up owning VXX with a net cost of around $23.50, then you have to manage the position. I would be inclined to be willing to hold it even if it slides to a slight loss because the odds of a volatility pop are so high. Remember, volatility pops a lot when it pops, so seeing VXX shoot to $50 for a week isn’t that weird.

Because of the possibility that volatility could surge, the second part of this trade is to buy calls on VXX if the price does in fact fall to about that $25 area. 

If I can buy the VXX June $25 calls for under $5 sometime later this month or in February, I’d be very inclined to wager on a spring pop in volatility – see reasons above, particularly Fed balance sheet which is a known. 

So, the follow up trade is to buy VXX June $25 calls for under $5, preferrably as close to $2.50 as possible. We’ll have to play it by ear, but this is a two part trade, selling the cash-secured puts and then buying calls if time without volatility lengthens and prices continue to decrease. 

I will follow up on VXX trades in coming weeks. This will be a regular idea until volatility comes back, which I feel is finally about certain.

Disclosure: I am/we are long VXX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I sold cash-secured puts on VXX. I own a Registered Investment Advisor – – however, publish separately from that entity for self-directed investors. Any information, opinions, research or thoughts presented are not specific advice as I do not have full knowledge of your circumstances. All investors ought to take special care to consider risk, as all investments carry the potential for loss. Consulting an investment advisor might be in your best interest before proceeding on any trade or investment.

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