The CBOE Volatility Index (^VIX), universally referred to as the VIX, is a measure of the market's expectation of 30-day volatility of the S&P 500 (^GSPC). It's not a measure of "fear." Saying a ramp in the VIX is a sign of panic is akin to asserting a rise in hospital visits is proof that more people are becoming hypochondriacs; it may be the case, but it also may be a sign of a looming pandemic.
Breakout asked Jon Najarian, co-founder of TradeMonster.com what the falling VIX --now under 15 and pushing on 52-week lows-- is really saying and how traders can profit from it.
In the attached clip Najarian explains that the low VIX reflects traders' expectations that the shrinking range in the S&P 500 is here to stay. Scoffing at the idea that a particular level on the VIX can be translated into a prediction or where the stock market "should" be, Najarian says levels hovering near 15 "means we're looking at about 8/10th of 1% as far as daily moves on the S&P 500."
It's entirely possible volatility over the next 30 days stays just that low. Traders convinced of such an outcome should strongly consider heading to the beach until after Labor Day. Those expecting bigger moves in stocks have an opportunity to start scooping up options at relatively low prices. Najarian suggests buying cheap puts then making a long-side bet with out of the money calls.
"If indeed we're going to see bigger moves than half a percent or eight tenths of a percent today and all of the sudden we're going to see multiple 2 and 3% moves out of the Dow and S&P 500, you will be rewarded like nobody else," Najarian gushes. "You'll be like Midas with that trade."
In trader parlance, being like Midas is a very good thing indeed.
Be sure to check out details of Jon's upcoming Invest Like a Monster conference in September.