You may have noticed that the old “fear index” (VIX) has soared of late, and is now above 21.  This compares to the 12 – 14 range where it has hung out most of the time for the past two years.  Just about every time it has popped up this high, we have seen it fall back to the lower range as soon as the current fear topic has disappeared or at least dissipated.

 

While there are several reasons why VIX is so high right now, one of them is probably the election.  In six days, the election uncertainty will be gone.  We may not like the outcome, but at least the uncertainty will no longer be there.

 

Another reason why VIX might be so high is that the market has fallen for 7 consecutive days, and today might be the 8th.   History tells us that this is about the maximum number of consecutive same-direction changes that take place.  We are due for a market rise in the next day or two.  That, too, should ease some of the uncertainty.

 

Here is a trade that I placed in my personal account today.  It is a bet that in three weeks, VIX will have fallen back below 15.  If it does, both calls will expire worthless and I will make 70% on my investment (and maximum risk) of $350 per spread.

 

BTO 1 VXX 23Nov16 21 call (VXX161123C21)

STO 1 VXX 23Nov16 15 call (VXX161123C15) for a credit of $2.50  (selling a vertical)

 

The natural price for this spread was $2.55 but I was able to collect only $250 for it.  A maintenance requirement of $600 per spread was created, but subtracting out the $250 I collected, my net investment is $350 per spread.

 

The break-even price for VIX is 17.50.  At any price above this number, I will lose money, up to a maximum of $350 plus $5 in commissions.

 

I think VIX is due for a tumble after the election, and feel comfortable about this bet, knowing that it is a speculation that I should only take with money that I can truly afford to lose.

 

Happy trading.

 

Terry