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Inverse ETF Plays as Volatility Reaches New Peaks

This article was originally published on ETFTrends.com.

With U.S. markets selling off Monday by nearly 3%, a lot of investors have been caught off-guard following news of China's currency weakening. It adds to the volatility created by President Donald Trump reversing the trade truce established with China, saying that a 10% charge would be imposed on $300 billion worth of Chinese goods coming Sept 1.

The added volatility has created opportunities for traders who are positioning to continue to reap big money as the sell-off gains steam.

Sizable bets had been placed on a comeback in market volatility in the two weeks leading up to the Fed’s Wednesday policy meeting. One area of particular interest to traders were the call options on the VIX, which suggested increased interest in a stock market selloff. Traders had been loading up on call options in the CBOE Volatility Index, a measure of the 30-day implied volatility of U.S. stocks also known as the VIX or “fear gauge,” betting on huge price swings in the market.

“There has been large call buying in VIX ahead of [the] much anticipated FOMC announcement. It is especially interesting in that we haven’t witnessed as much bulky activity in VIX options since the great ‘Volpocalypse’ of 2018,” said Maxwell Grinacoff, a derivatives and quantitative strategist at Macro Risk Advisors, in a note earlier in the week. “Volpocalypse” refers to the event in February 2018 when the VIX doubled as the Dow Jones Industrial Average tanked more than 1,000 points twice in a week.

Well, traders had their bets met, with the VIX jumping from under 12 on July 25 to over 22 today, a move of 83% in less than 2 weeks, as the S&P 500 has plummeted from the 3,030 area to 2,867 today.

While investors can trade directly on the VIX, it is generally done with futures. However, those who believe the VIX will continue to languish or move lower could explore an ETF such as the  ProShares Short VIX Short-Term Futures ETF (SVXY) , which follows the inverse or -100% daily performance of VIX futures.

A bullish bet on the VIX is also akin to a bearish one on stocks, and vice-versa. Meaning that investors who see increased volatility in the coming weeks could consider allocating funds to an inverse ETFs such as the  ProShares Short S&P 500 (SH)  or the  ProShares UltraShort S&P 500 (SDS),  while those who see continued compressed volatility could look at a more traditional bullish stock allocation with ETFs like the  UltraPro Long S&P 500 ETF (UPRO)  or the  Direxion S&P 500 Bull 2x ETF (SPUU).

For more information on the CBOE Volatility Index, visit our  VIX category.

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