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August 03, 2014 at 09:34 AM
In case you missed it, the stock market you’ve grown accustomed to–you know the one with light trading volume and low volatility–has gone on summer vacation.
The S&P 500 Volatility Index (VIX) soared 27% on July 31 alone, ending the month with a rollercoaster bang.
Up until now, the dominant chatter by talking heads in the financial press has been how volatility has been virtually non-existent because the VIX is down 29% during the past two years.
Utter nonsense like “the VIX is too low for a market crash” has spread faster than news about LeBron heading back to Cleveland.
Actually, the 46.5% gain for the VIX in July 2014, was the seventh largest monthly rise in the VIX since 1990.
Just ahead of this latest volatility outburst was the 48% spike in VIX in February 2007. That was the same month that hedge funds managed by the now defunct Bear Stearns experienced their first monthly losses ever. Remember how it seemed that wonderfully delusional period of good times would never end?
One July 9 when VIX traded just under 12, we said via our Weekly ETF Picks: “While most market participants are expecting a lack of stock market volatility to be a sustainable trend–we’re betting the opposite. When another short-term pop in the VIX arrives fast and furious, we’ll be ready. We’re buying the VIX August 2014 11 call options (VIX140820C00011000) at $200 per contract.”
How did it turn out? Our August 2014 VIX call options are now up more than 90% and we were able to bag a double digit gain from a major stock market trend that most people missed. Doing the exact opposite of the crowd never felt so good!
