Mr. Market seems to have forgotten that December is supposed to usher in good tidings and higher stock prices sprinkled with low volatility. All its done this year is punch the bulls in the face.
Perhaps Santa Claus’s arrival will mend the situation, but for now the number of knockouts is climbing.
While the selling sickness had been focused overseas and in commodity land, it’s finally reached our shores in the U.S. The S&P 500 is now down some 5% while the popular CBOE Volatility Index (VIX) is extending its super spike.
Traders looking for seasonal influences to return in the back half of the month should be viewing the current volatility surge as an opportunity. Unless we go into full meltdown mode, the VIX spike has a good chance of falling back down.
Perhaps the most popular method for making bets on the VIX by stock traders is to use the iPath S&P 500 VIX Short-Term Futures ETN (VXX). Because it holds short-term VIX futures contracts the VXX does a fairly good job of mimicking the movements of the VIX index — at least in the short run.
Should the VIX index fall from its lofty perch, the VXX will be taken down as well.
How to trade VXX
One of the better strategies for positioning yourself to profit from a decline in VXX is buying a put spread. The lower price tag will keep the cost contained limiting our risk if volatility decides to continue spiking.
Buy the Jan 33-30 put spread for $1.90. Consider it a bet that VXX falls back below $30 by the Jan expiration. The max risk is limited to the $1.90 paid and will be lost if VXX rises above $33. The max reward is limited to $1.10 and will be captured if VXX does indeed drop to $30.
At the time of this writing Tyler Craig had no positions on any of the aforementioned securities.
