Traders can capitalize on volatility spikes in the equity market, like the wild price swings seen in February and December last year, by using exchange-traded funds (ETFs) that broadly track the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The VIX, referred to as the "fear gauge" by many traders, represents the stock market's expectation of 30-day forward-looking volatility.
ETFs linked to volatility can also be used by those who want to short the market, as the VIX typically has an inverse relationship to the S&P 500 Index. In data outlined by the CBOE, the VIX moves in the opposite direction of the S&P 500 about 80% of the time.
The VIX fell from open-to-close for 13 consecutive trading sessions before modestly rebounding Wednesday. Analysts at Bespoke Investment Group noted that the median one-week forward S&P 500 return after the VIX falls for at least 10 straight sessions has been negative, per a recent Bloomberg article.
Market participants who see increased volatility returning in the short term with a corresponding fall in stock prices should add these three VIX ETFs to their watchlist. With all three funds sitting at key technical support, now may be an opportunistic time to bet against January's bounce continuing.
iPath S&P 500 VIX ST Futures ETN (VXX)
Created in 2009, the iPath S&P 500 VIX ST Futures ETN (VXX) seeks to track the S&P 500 VIX Short-Term Futures Index. The underlying index provides exposure to the CBOE Volatility Index with average one-month maturity. VXX has a 0.02% spread and average daily dollar volume of over $1.7 billion that makes it a suitable instrument for both day traders and swing traders. As of Jan. 18, 2019, the fund, which charges a 0.89% management fee and has $888.45 million in net assets, has fallen nearly 20% year to date as volatility has subsided in the new year. Traders should note that this ETN will be called on Jan. 30, 2019.
VXX trended steadily lower between April and September before surging 83% over the fourth quarter. The ETN has recently retraced back to the $38 level, where it finds support from the upper trendline of a broad symmetrical triangle pattern. Traders who decide to go long should consider booking profits on a move back up to the December high and positioning a stop-loss order just below the 200-day simple moving average (SMA).
ProShares Ultra VIX Short-Term Futures ETF (UVXY)
The ProShares Ultra VIX Short-Term Futures ETF (UVXY), with $206.16 million in assets under management (AUM) and launched in 2011, aims to provide one and a half times the daily exposure to the S&P 500 VIX Short-Term Futures Index, which consists of first- and second-month VIX futures positions with a weighted average maturity of one month. A tight spread and deep liquidity make the ETF ideal for traders, although its pricey 1.90% expense ratio can erode profits for longer-term holds. UVXY is down 28.72% for the year as of Jan. 18, 2019.
The ETF temporarily continued higher after a bullish "golden cross" signal appeared on the chart in December. However, since that time, the fund has pulled back to a high-probability trading area. Price finds a confluence of support from a downtrend line extending back to early April 2018 and the 200-day SMA at $59. A short-term uptrend line that connects several swing lows adds further support from which an upside reversal could occur. Those who buy at current prices should set a take-profit order near $90, where the fund may encounter resistance from the December swing high. Think about placing a stop below the Dec.4 wide-ranging day to protect trading capital.
VelocityShares Daily 2x VIX Short-Term ETN (TVIX)
Formed in 2010, the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) attempts to replicate two times the daily performance of the S&P 500 VIX Short-Term Futures index – the same benchmark used for UVXY. Over 14 million shares change hands daily, which provides ample liquidity for traders who want a more leveraged bet that volatility will return to equity markets. Traders should be aware that the fund's issuer, Credit Suisse Group AG (CS), could halt trading in TVIX if it cannot effectively hedge its position. As of Jan. 18, 2019, the ETN, with a 1.65% expense ratio and AUM of $475.68 million, has returned -35.92% YTD.
TVIX's chart shows similar price action to the funds mentioned above. Although the TVIX share price is trading below the 200-day SMA, it finds significant support from multiple trendlines at the $45 level. Conservative traders may decide to wait for a bullish reversal candlestick pattern, such as a hammer or piercing line, to print before executing a trade. Consider using a $10 stop and a $35 profit target, which offers a favorable 1:3.5 risk/reward ratio ($10:$35).