Profit From Volatility (VIX) Using SVOL ETF

Ever felt like the stock market was on a rollercoaster that you just couldn’t get off?

On 5 August 2024, global conditions cumulated in what seemed to be the perfect storm for stock markets worldwide, and even the most seasoned investors held their breath.

Volatility levels spiked to pandemic levels last seen in March 2020.

But here’s the thing: what if I told you that this wild ride actually put some extra cash in my pocket?

Reasons For The Perfect Storm On 5 Aug 2024

Many experts have offered their views as to what caused the Black Monday of 2024, and the list is a really long one.

• Economic concerns: Disappointing data on manufacturing and layoffs, along with lower-than-expected job creation numbers and a rising unemployment rate in July, triggered recession fears.
• Federal Reserve policy: There are worries that the Fed is waiting too long to ease interest rates, which are currently at 23-year highs.
• Currency market shifts: An unexpected rate hike from the Bank of Japan sparked the unwinding of the “carry trade” involving the Japanese yen.
• Corporate earnings: While many companies beat profit forecasts, fewer topped revenue estimates. Forecasts from some major tech companies have raised concerns.
• Geopolitical issues: Ongoing concerns about situations in the Middle East and Ukraine, as well as changing political dynamics in the U.S.
• High market valuations: The S&P 500 was trading at about 15% above its normal five-year level, making it vulnerable to a correction.
• Risk-off sentiment: A general shift in investor sentiment towards less risky assets.

Regardless of which of the above reasons contributed to the perfect storm, one thing is for sure.

Volatility spiked to levels not seen before since March 2020, and we all know what happened then.

CBOE Volatility Index (VIX) – What Does It Mean?

Below is my simple explanation of the VIX, which should suffice for the purpose of this article.

The VIX, often called the “fear index,” measures expected stock market volatility over the next 30 days.

1. What VIX measures:
   • The VIX estimates how much the stock market (specifically the S&P 500 index) is expected to fluctuate up or down over the next month.
   • It’s expressed as a percentage, representing the expected annual range of movement.
2. How to interpret VIX:
   • A higher VIX value suggests investors expect more market volatility.
   • A lower VIX value indicates expectations of calmer market conditions.
3. Typical VIX ranges:
   • VIX values below 20 generally indicate relatively calm market conditions.
   • Values above 30 suggest high anxiety or uncertainty in the market.
4. What VIX tells us:
   • The VIX gives a sense of market sentiment and risk perception.
   • It can help investors gauge whether the market is overly fearful or complacent.
5. How is VIX calculated:
   • The VIX is derived from the prices of S&P 500 index options.
   • There is a lot going on, but basically, it looks at how much investors are willing to pay to protect against or bet on market moves.
6. Why is VIX’s nickname the “fear index”:
   • This is because the VIX tends to spike when markets are falling, as investors become more fearful and uncertain.
7. How to use VIX in investing:
   • Sophisticated investors may use the VIX to time market entries and exits.
   • It can be a contrarian indicator: extremely high VIX values might signal a good time to buy stocks, while very low values might suggest caution.

VIX Is Just One Indicator

Remember, while the VIX is a useful tool, it’s just one of many indicators investors use to understand market conditions.

It doesn’t predict the direction of the market, only the expected level of volatility.

Can We Use ETFs To Profit From Elevated VIX?

Obviously, I have to put out the disclaimer that this is not a sure-win strategy because there is no such thing in this world.

It just happened that it has worked out well for me on the past few occasions.

When VIX spikes to extremely high levels, data shows that historically, they don’t tend to stay elevated for long periods of time.

Based on historical data that I downloaded from Yahoo Finance, we can group the distribution into value bands to see what are the most common VIX values.

Using historical VIX data, we can see that intra-day high values have ranged between, with the distribution of those days illustrated in the table below.

On 5th August 2024, VIX climbed to a high of 65.73.

For reference, VIX has only exceeded 65 on 42 days in its entire history of 8,715 days with data. The only occasion in recent years that VIX has reached this level was in March 2020, when the COVID pandemic swept across the globe.

A few tools are available, and I have chosen to use the SVOL ETF.

The Simplify Volatility Premium ETF (SVOL) seeks to provide investment results, before fees and expenses, that correspond to approximately one-fifth to three-tenths (-0.2x to -0.3x) the inverse of the performance of the Cboe Volatility Index (VIX) short-term futures index.

The idea is simple.

• When VIX hits my target band, I would buy SVOL ETF (or any of the available alternatives that perform inversely to the VIX)
• When VIX retreats back to band 2 or band 3, I would sell SVOL ETF to retrieve my capital and park the remaining in SVOL as passive income

Summary

Market volatility can be intimidating, but it also presents opportunities for me to profit from it.

Here are three key takeaways:

• VIX as a Market Barometer: The CBOE Volatility Index (VIX) serves as a crucial indicator of market sentiment, with values above 30 signalling high anxiety and potentially presenting investment opportunities.
• Historical VIX Patterns: Extremely high VIX levels, such as those seen on August 5, 2024, are rare and typically short-lived, suggesting a potential for market stabilization and recovery.
• SVOL ETF Strategy: The Simplify Volatility Premium ETF (SVOL) offers a way to potentially profit from volatility spikes by inversely tracking VIX futures. This allows investors to capitalize on the expected normalization of market conditions.

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Kevin started Turtle Investor when his net worth languished at negative $25,755. His desire to turn things around led him to build passive income from investments and side hustles that pay for his daily expenses and vacations. You can learn more about Kevin here.