It can sometimes be a little confusing to the average investor when the media and financial market communities throw around the phrase “the VIX is dead”. But when we review the chart of the VIX itself, we come to acknowledge how docile the market and the VIX really are over time.
As depicted in the VIX chart, it becomes quite clear that volatility, measured by the VIX/fear index, can remain quite complacent for extended periods. In fact, volatilities very nature is to remain complacent far longer than expressing outsized volatility. Regardless of the factual representations offered in the VIX chart, which goes all the way back to 1991 and encompasses major market events, for some reason many traders and investors look to go long volatility in any of its form factors. The VIX or volatility doesn’t die nor does it have the ability to die, but rather it expresses an ability for a market or markets to mature past the point of greatest fears and from the events that cause fear to have taken place. In other words, the fearfulness surrounding the “what’s the worst case scenario” curtails as the perceived worst-case scenario actually occurs. The Savings & Loan crisis, Dot Com bubble bursting, 9-11 and the Financial Crisis have all given birth to a more resilient market and more fearless traders/investors.
It has come to be that even with markets around the globe expressing all-time highs, record sovereign debt levels, political uncertainty and currency “manipulation”, fear or volatility is near record low levels in the United States equity markets. Really short and really sweet; the VIX is not for those betting against the market, is not a viable hedge against a potential market pullback and is not an instrument for those with long, long-term intentions. Moreover, to succeed with profits by going long volatility with the VIX or any direct VIX-leveraged instrument, the timing must be impeccable and cheaply acquired, which is a rarity in and of itself. Nonetheless, even with the apparent pitfalls and seemingly narrow path to profits from positioning long the VIX, many people do so…even those supposed professional traders and media participants on CNBC’s Fast Money.
It was a little over a month ago that the markets were going up against several political and global events. These votes included an Italian Referendum vote, the eventual Inauguration of Donald Trump, U.S. equity indices hitting all-time highs and much more. It was around this time that Fast Money’s Pete Nejarian expressed on air that he had hedged against a market pullback by going long the VIX against his long positions. This wasn’t the first time Mr. Nejarian outlined the strategy and it wasn’t the first time I had followed (not positionally, but in event chronology) his thought to see how the strategy would pan out. Of the many times the Fast Money contributor outlined this strategy to viewers, Mr. Nejarian lost money on this “hedge”.
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