A mysterious buyer known only as the "50 Cent" trader has been betting big on a U.S. market collapse - and losing millions along the way.
- This Mysterious "50 Cent" Trader Is Betting Millions the Markets Will Collapse
- How Pundits Are Misleading You About Market Emotion
- How This New "Fear Gauge" Could Fix the VIX
- Peter Schiff on U.S. Dollar Crisis: "The Dollar Bubble Is Going to Burst"
- S&P 500 and Nasdaq Suffer Worst Week Since May 2012
- What Yesterday's Volatility Index (VIX) Spike Says About the Market Today
- DJIA Rallies Back with 123-Point Gain After Thursday's Dive; Here Are the Top Stories
- Can the Dow Jones Today Recoup 17,000? Here's Friday's Top Stock Market News
- A Cut-to-Bone List of the Top Stock Market News Stories Today – FDO, LL, BAC, and More
- How to Trade the VIX: Using the "Fear Gauge" to Hedge Down Markets
- The VIX Indicator: What this Contrarian Index is Telling Us Now
- The Stock Market Volatility Index: What the VIX is Telling Investors
- Two Sentiment Indicators Investors Should Watch
Financial talking heads refer to market emotion a lot in their various predictions about where indices are going next and how you'll be affected.
But these pundits often fail to include a particularly popular trading strategy in their forecasts.
If you follow the stock market, you know what the VIX is. It's the volatility index. But here's something you may not know: the VIX is about to face some competition - and with good reason.
Today, I want to take a closer look at what volatility is, show you exactly what the VIX does (and doesn't do), and tell you why now's the perfect time for a new, more modern approach to how we track volatility.
Peter Schiff, economist, best-selling author, and CEO of Euro Pacific Capital, believes a U.S. dollar crisis is underway.
"The dollar is very overvalued...and the dollar is a bubble," he told Newsmax Prime on Aug. 11. "This dollar bubble is going to burst."
Indeed, two weeks later and Schiff's prediction proved timely. The U.S. dollar index has suffered a fourth-straight loss, and U.S. markets have plummeted in the worst weekly sell-off in four years.
U.S. stock markets continued their downward spiral today (Friday). The sell-off accelerated in the final hour of trading, with the Dow Jones Industrial Average slipping another 115 points. This was the worst week for both the S&P 500 and the Nasdaq since May 2012.
The S&P Volatility Index (VIX) jumped another 13%, finishing one of the most volatile trading weeks of 2014.
Yesterday (Thursday), the Volatility Index (VIX), often referred to as the "investor fear gauge," jumped 32.2%, its highest advance on the year and the index's biggest surge since April 2013.
The VIX spike was triggered by the downing of a Malaysian passenger plane on the Ukrainian-Russian border and an Israeli invasion of the Gaza Strip after ceasefire talks broke down.
Stock market close, Friday, July 18: The DJIA bounced back on Friday, up more than 100 points following Thursday's worst performance since early April. Geopolitical tensions remain high following the attack on a Malaysian jet airliner over Ukrainian skies yesterday morning, and Israel's tactical launch inside Gaza.
Stock market news today, July 11, 2014: The Dow Jones today (Friday) will open just 85 points under 17,000 - a level it was able to achieve late last week, but has since slipped back under.
Yesterday, U.S. markets ended in red across the board on news that Portugal's Banco Espirito Santo had its top shareholder halt the sale of the bank's stocks and bonds. At its worst, the Dow Jones was down 180 points intraday, while the Chicago Board Options Exchange Volatility Index (VIX), typically known as the Fear Index, jumped more than 5%.
Stock market news today, July 10, 2014: At its worst, the Dow Jones was down 180 points intraday. The Chicago Board Options Exchange Volatility Index (VIX), typically known as the Fear Index, jumped more than 5% this afternoon.
On the jobs front, the number of Americans seeking unemployment benefits reached a seven-year low.
While most investors are scrambling to figure out whether the market is headed up or down, savvy pros use the VIX both as means of protection and a source of profit.
In fact, Money Morning Capital Waves Strategist Shah Gilani last week alerted his Capital Wave Forecast subscribers to a VIX trade that would add some protection to their portfolios.
"Call me a Nervous Nellie, if you like," said Gilani, "but I'd rather lose out on a hedge than get killed because I didn't have one on when the proverbial shot hit its mark."
That's why knowing how to trade the VIX is so essential.
But before we get into how to trade the VIX, we need to understand what the VIX actually is.
What the VIX Indicator Measures
Most investors think of the VIX simply as a "fear gauge."
But contrary to what most people think, the VIX doesn't measure actual stock market volatility.
In fact, experts view the VIX as possibly one of the best contrarian indicators in the business.
Most investors think of the VIX Indicator (VIX) as the "fear gauge."
True to form, the old saying with the VIX is, "When the VIX is high, it's time to buy."
But experts look at the VIX as much more than just an index.
They view the VIX as possibly one of the best contrarian indicators in the business.
While most investors are scrambling to figure out whether the market's headed up or down, savvy pros use the VIX both as means of protection and a source of profit.
"It gives you an idea of how uneasy people are about the markets," Joe Levin, vice president of product development at the Chicago Board of Options Exchange (CBOE) told CNNMoney.
That is, it tells you whether or not the markets have reached an extreme level of sentiment - either bullish or bearish.
More often than not, it is the action in the VIX that signals major market tops and bottoms.
But before we get into how to use the VIX, we need to understand what the VIX actually is.
The stock market volatility index (VIX) - or "fear gauge," as it's often called - has been giving off unexpectedly low readings in 2011.
But don't be fooled. Things aren't what they seem.
Structural dynamics are currently suppressing the VIX, and are diminishing its predictive power.
If you want to trade this as a speculative investment - or even if you just want to use the VIX to better hedge your portfolio holdings - you need to understand the forces that are working on this stock market volatility index.
Let me explain ...
I Was There for the Birth of the VIXBack during my hedge-fund days, we used Monchik-Weber machines with their built-in Black-Scholes options pricing formula to help us mathematically measure put and call-option values. The computers would provide us with the theoretical value of the options we were trading.
But it wasn't long before a gap between those theoretical values and the actual market prices drove us to find a different way to measure volatility. To calculate "implied volatility" - the estimated volatility extracted directly from bids, offers and actual prices - we looked at real-time prices as opposed to theory.
Simply put, based on actual prices for calls and puts on the OEX, we separated out implied volatility and used it as a measure of what traders were expecting to happen.
This volatility measure is the expectation of price movement over the next 30 days. The higher the reading, the more likely stocks are to move in one direction or another.
Over time, our volatility index became known as the VIX. And eventually, the VIX - not the OEX - became a measure of options-pricing volatility based on the Standard & Poor's 500 Index.
The VIX is called the "fear gauge" for a good reason: As that index rises, it's basically telling us that traders and investors are paying a greater premium to buy options, mostly because they are "paying up" to buy puts.