I’m a devout risk-manager. When I trade, I am far more concerned with not losing a lot than I am making maximum profit. And I see the pros and cons of that posture, over and over again. That’s why, when I coach traders and investors, the first thing I emphasize is for them to personalize their trading in every way possible. They are not me, and vice-versa.
A good way to test where you sit on that risk management spectrum is to present you with what I’d consider to be a high-flying option collar scenario. Based on what appeals to you or doesn’t about this timely example, you’ll likely learn a bit more about your risk tolerance. At least, that’s my hope.
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Volatility is measured by the CBOE Volatility Index ($VIX). The “VIX” has been around for a long time. And while it might not be well known to some newer traders and to many long-term investors, when it has its “moment,” ittends to move front and center in market headlines.
You can see from this 30-year history that the VIX spends a lot of time around the 10-20 level. That’s considered a normal range. It has also seen 40, 50, 60 and nearly 90 in the past.
VIX recently peeked its head above the 20 mark, after spending most of the year below that, signaling that some unsettling feelings have crept into the market’s psyche.
The VIX is a forward-looking indicator of sorts, as it uses past data to project the degree to which the S&P 500 Index ($SPX) is likely to fluctuate in the 30 days just ahead. So the recent move higher is worth noting.
And in my book, when something is worth noting, the immediate follow-up question is “how can I profit from it?”
First, by having VIX continue to rise into Halloween and perhaps Thanksgiving, as it has done at some infamous moments in the past, coinciding with major market crises and memorable stock market pullbacks.
And second, by proactively seeking ways to exploit a spiking VIX, if it were to occur.
There are a couple of ETFs that track the VIX, but I’m skipping right past those here, other than listing one in a table just below. The main subject of this article, the Ultra VIX Short-term 2X Futures ETF (UVXY), aims to deliver twice the movement of the VIX. That said, in my experience trading it, I note that 1.5-2.0x has been a more expected range.
