Capitalizing on Fear in the Market

Focus: FUTURES

Andy Waldock Image Andy Waldock Founder, Commodity & Derivative Advisors

Even though the VIX is already at a five-year low, VIX futures seem to be predicting that it could go even lower, and trader Andy Waldock of Commodity & Derivative Advisors offers an idea for playing its inevitable rebound.

The S&P 500 is within spitting distance of the 2007 highs. Remember 2007 when the economy was rolling along and everyone used the equity from their first house to buy a second or, third? Home ownership became everyone’s entitlement—the American way. Five years of deleveraging later and we’ve figured out that corporations know how to manage their businesses better than the bureaucrats know how to run our economy. Corporate balance sheets are healthy and interest rates are at all-time lows. Unfortunately, the government can’t figure out spending for a quarter, let alone an entire fiscal year.

We have written extensively on the topic of using stock index futures to hedge your retirement account. Typically, the response is, “How can I sell something I don’t own?” This week we are going to discuss volatility index futures. This is a product offered by the Chicago Board Options Exchange and it trades opposite the stock market. Therefore, buying VIX futures provides protection from a downdraft in the stock market while simultaneously limiting the risk of the hedge position.

First, it’s important to understand that volatility in the stock market is primarily associated with fear. Stock market declines put fear into the market’s participants.