Signup for our free newsletter:

A Reminder to Trade the VIX...

Written By Brian Hicks

Posted August 11, 2010

As we said a couple weeks back, trade the VIX with VXX.  Today’s broad market sell off, and a Fed (that has no idea what it’s doing) that’s lost control of its “recovery” is further proof of why you need a volatility trade.

Here’s what we said in a previous Wealth Daily Weekend Edition report… Enjoy.

Ignore the economists and analysts telling us a double dip isn’t likely…

Tell me, do you need any more proof that the economy is in trouble?

More importantly, do know how to profit from the ensuing volatility, as all goes down the toilet, using a no-options options trade?

Why are investors so worried?

“What has been gratifying is the fact that the economy now is starting to stabilize and grow again,” Obama just told “The View.” But it’s just not true.

Bernanke told us three weeks ago “We’re in a continued recovery… that just ‘won’t feel terrific’.” But that’s not true, either, as proven by yesterday’s Fed downgrade of the economy.

There’s even growing fear that scheduled 2011 tax increases could result in an 8.6% drop in the S&P 500, according to Barclays.

And there are still indications of another dip

Just what’s gutting the housing market, sending consumer confidence down the toilet and killing whatever recovery chances we had?

Simple: The “recovery” was nothing more than a figment of the Fed’s imagination — a mirage of massive bailouts, stimulus programs, and dollar printing.

Sure, we saw GDP growth… Big deal.

The core problems that took us into the last recession are still there.

They never went away. Close to 20% (real number) of America is unemployed; consumer confidence is fading.

Even Bernanke has to see a crippled housing market, stuck in a depression…

And an indicator with a 40-year history of calling recessions just said we’re falling into recession. Yep, the trusted Economic Cycle Research Institute weekly leading indicators fell as low as -10.5.  Every time this indicator has fallen under -10% since its 1967 birth as an indicator, a recession has followed.

Investors aren’t as stupid as the White House and Fed believe. They know what’s happening.

But many don’t know how to profit from it…

Here’s how to profit — and you have to jump on it NOW

A great tool for defining tops, bottoms, and reversals has been the CBOE Volatility Index (VIX) — a measure of fear in the market that can tell us how optimistic or pessimistic investors are.

When the VIX climbs, fear is rising; when it falls, fear is falling.

(For example, during the recession of 1998, the VIX jumped to its highest level. After September 11, 2001, it hit another extreme high — meaning fear was rampant, and rightfully so.)

For options traders, the VIX also helps determine the premium for options. With higher volatility, options traders pay more to reduce risk of using options.

This past week, the VIX fell to 23 — its lowest level since April. That, after the last “flash crash” of May 2010 sent it from 23 to 40 in just hours. I’m sure you remember. It also took premiums down on options, meaning it was a good time to buy options.

And since we see more volatility ahead, given the double dip and apocalyptic realities I’ve detailed in these pages before, you can profit from the VIX without having to buy options.

Instead, you can buy the Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) around $23. It rises with the VIX. It shot up about 50% in May when the market flipped out over the European debt crisis.

Use it again here… as the market loses whatever is left of its mind.