The Volatility Index (VIX), an interesting investment opportunity
In this article I’ll be discussing the VIX, what it is and most importantly, how you can play it.
What is it?
A volatility index tracks the volatility in a sector, this means that when times are calm and the markets are going slowly up, Volatility indexes will be low.
At rougher times however, like now, the markets imply more volatility due to the general uncertainty. In these volatile, uncertain periods the VIX goes up.
There’s a big range of Volatility indexes which each track their respective market, but the one I’ll be talking about today is the S&P 500 Volatility Index (VIX) which tracks the volatility of the 500 biggest companies in the USA.
As you can see, it’s quite a beast of a chart, the two highs as you may have already guessed are the 2008 crisis and then March 2020, where the VIX hit 80 and 66 Dollars respectively.
And it’s already here you can see my main interest in the VIX, it goes up and down a lot but tends to mostly stay in the same intervals, it also tends to come back down to about the same levels which makes it handy for swing trading.
The Investment opportunity
As I just said, the VIX ranges a lot between the same intervals and always comes back down to about the same levels, this is called a range rider.
As the name says, because it rides between two ranges, it allows you to quite easily swing trade if you have some patience.
I have three main levels, a bottom/dip level at 15 USD where you should be buying, then a local top at 24 and a higher top at 35 USD.
As you can see, these levels have been working quite well in the recent future and while you might not get the absolute tops, as seen in the beginning of the chart, you’ll still be getting some nice deals. If you do wish to optimize these levels however, you can use some TA and macro-news to try and gauge the absolute tops.
I’d distill this down to two main trading possibilities:
Firstly swing trading the 15 and 24 USD levels for some quick getting in and out of positions, but with smaller profit margins. (60% profit)
Or for the people with more patience or those want bigger profit margins, swing trading the 15 & 35 USD level. (133% profit)
Do however please consider that these levels change, for example back in 2018 the dip buying level was at 12, while in 2020–2021 the bottom was at 21 Dollars.
So these ranges definetly differ based on the overall health of the economy and other macro situations.
Personally, I’m thinking about swing trading the 15 and 24 USD levels. While the profit margin is a lot smaller as opposed to waiting for higher tops, you do consistently get cash flow coming in which is great to buy up dips in other assets.
The VIX is definetly something to keep in the back of your head and might be interesting to pick up when markets finally decide to calm down.
Personally, I’ll be waiting at the 15 Dollar level with a limit order myself. While this is a more speculative investing method than simply DCA’ing into an ETF or your favourite blue chip stocks/cryptos, I don’t see this as a particular risky strategy.
If you stay patient with your limit orders and disciplined when selling, there’s definetly some nice extra profit and Cashflow to be found here, which will come out very nice to buy up dips whenever they occur.