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Risk VS. Reward Of Buying The Volatility Index (VIX)

Published 01/23/2013, 03:48 PM
Updated 07/09/2023, 06:31 AM

The Volatility Index -- aka the 'Fear' Index -- is sitting near 12, a level not seen since 2007, just before the financial collapse. While housing prices are not where they were, other bubbles have formed, mainly in the bond market.

To see the VIX near 12 is scary to say the least.

How Safe Is fear?
So is it smart to invest in an ETF that tracks fear? Let's take a look at the VelocityShares VIX Short Term ETN (VIIX) and iPath S&P 500 VIX Short Term Futures TM ETN (VXX). Both allow you to play volatility but each carries with it additional risks. First, understand that each month these ETF's must roll over their VIX contracts. In doing so, there is some slippage that occurs. Like many double and triple ETF's, these will eventually go to zero over the long term. Because of that, they should only be used as short-term trading vehicles, held for days or a few weeks.

If you only use them as short-term vehicles, they're fantastic if you can read the market like a pro. This market is as complacent as ever. Retail investors are dumping cash into the markets at a record pace just like in 2007. There is an overlying feeling the Federal Reserve will always be there to bail out the markets with more money printing. While the VIX could see $10, the risk-reward definitely favors the upside. I myself am scoping it out, looking for the proper entry for a small position in the next few days.
iPath S&P 500 VIX
Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com

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