Is Investing in Volatility the Right Play for an Uncertain Market?

Brittney Barrett |

Wednesday marked the sixth consecutive session of losses for the S&P 500, the longest period since February 2009. The recent descent of the market has prompted not hysteria exactly, but certainly a cyclical anxiety among investors fearing a double dip at the end of the second quarter. The end of quantative easing and a potential rate hike from the Federal Reserve have investors looking for coping mechanisms in these uncertain times. When little else can be predicted, the most attractive bet often appears to be volatility. It may be worthwhile to note though, that   the scope of a downturn to prompt volatility related options to become profitable exceeds investor expectation. The worth of these assorted funds and notes, which number around ten, have seemingly declined in. The combination of high expenses and a necessity for roll yield, alongside a fear index that has become more stable and somewhat overbought, makes profiting from these avenues more difficult. Even given this very tough week for Wall Street, the reaction of the VIX or volatility index has been tepid at best.

Is the VIX up? Yes, to its highest close since March. Is it showing seismic shifts that could produce major profitability? The answer, unless faced with unlikely odds, is no. The VIX is still at around 18.60 as of yesterday after close. In March it was closer to 30. To get the volatility index to move, there needs to be a massive decline all at once. A slow crawl of losses, even if it lasts longer than investors feel appropriate, might fail to move the VIX.

As a result of this, betting long on the VIX, tends to be inadvisable. While it cook spike momentarily, the likelihood is that it will correct  itself before any major payoffs appear.

If volatility investment is a must, VelocityShares Daily 2x Short-Term ETN (TVIX) seems to be the best bet. Velocity leverages shares to attain 200 times the daily return of VIX futures. Velocity Shares is arguably the most favored play on panic, especially for investors who move quickly.

Then there are the rest of them, and there are many. These types of funds need a lot of managing. Volatility is measured not by the up and down but the reaction of the market. If stocks are already low after a slow decline, investors might think the worst has come and is soon to go, thereby lowering volatility. Making huge margins on fear requires two things, an essential crash of the market, which is historically rare, and a perspicacious investor who is closely monitoring market activity.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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