A prolonged period of low volatility, which has been the dominant case in the market over the past year, is a common sign that investors are becoming or already are complacent. It should just about go without saying that, when the broad market becomes careless with its capital, it is often a strategic decision to turn defensive. With the rise in popularity of exchange-traded funds (ETFs) that are used to track the volatility index, also known as the fear index, it is now possible to hedge or bet on rising or falling levels of volatility. In this article, we look at several charts that can be used to trade the rise in volatility and try to determine how active traders will look to position themselves over the weeks ahead.
iPath S&P 500 VIX Short-Term Futures ETN
One of the most popular exchange-traded products used by retail and professional traders to gain exposure to volatility is the iPath S&P 500 VIX Short-Term Futures ETN. The VXX ETN has been the topic of much discussion in the media in recent months because of massive trade currently under way that is destined to make approximately $265 million in profit in the event that a set of very specific conditions are met. (For more detail, see: Traders ‘Shocked’ by VIX Bet That Could Pay $265M.)
Taking a look at the chart below, you can see that the ETN has been trading within a defined downtrend. However, the recent rise in volume combined with the break above the trendline now suggests that the story is changing and that higher levels of volatility could be coming. Heightened volatility could also be used to suggest that the markets could be nearing a turning point and heading for a pullback toward long-term levels of support. (For related reading, check out: Tracking Volatility: How the VIX is Calculated.)
Breakouts on the charts of key volatility-related ETFs suggest that investors may want to protect against further volatility in coming weeks. …read more
Read more here: 3 ETFs for Trading the Spike in Volatility
Category: VXX, UVXY, XIV