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No fear: Watch for dropping volatility

Kevin Chupka
Executive Producer/Writer

George Soros says the market is going lower. He’s so certain he’s backing it up with a big bet. According to his firm’s 13F filings, “Soros Fund Management” increased a put on the S&P 500 SPDR ETF (SPY) by 154% in the fourth quarter. It’s now the largest position in the fund and is valued at $1.3 billion. Soros must be pretty sure of himself.

That’s not to say the rest of the trading world shares in his confidence. Take a look at volatility. After popping above the 20-level earlier this month the volatility index (^VIX) has settled down again below 14. It’s a trend Ryan Detrick, Senior Technical Strategist at Schaeffer's Investment Research, says could stick around for several years. “I’ve come on with you guys for almost a year now saying volatility is probably gonna stay low. By low we’re saying that 20 level or so, potentially for several years. We’re only two years in, we could have another couple years of low volatility.”

So how is he playing this trend? Detrick notes that “when you look at the option activity...we’ve seen continued VIX call records, there were 8.4 million calls on the vix last month which was the all-time record...When the masses think one way, usually it pays well to go the other way.”

So Detrick and his Shaeffer’s colleagues are looking for those VIX pops up to the 20 level and are then buying puts on the ETN that tracks VIX futures, the VXX.

For those who would argue against Detrick’s belief that the VIX will stay relatively low for years to come, he points to last year’s market noting, “last year we only had three days up more than one and a half percent, and we gained 30 % for the year. Sometimes slow and steady wins the race.”

By that logic Soros could still be right if he has the patience to watch the market tick lower over time.