‘Fear Index’ Got You Scared? Don’t Be.

by Jon Markman | June 10, 2013 12:17 pm

Investors might be bracing themselves for a rough summer[1], but in the short-term, I’d take the panic with a grain of salt. Investors have a tendency to freak out with very little provocation.

Case in point: VIX values during the past 10 days.

Click to Enlarge As you can see in the chart, the S&P 500 (SPX[2]) fell as much as 2.5% during the past 10 days, which is not too bad. If a single stock in your portfolio went down 2.5% it would barely register in your consciousness. Yet, the S&P 500 Volatility Index (VIX[3]) shot up 25% as nervous investors overreacted to the decline by buying options to protect their positions.

One reason is that they are human beings who still have the experience of the bear markets of 2000-02 and 2008-09 — not to mention the big midyear swoons of 2010, 2011 and 2012 — in their memory banks. They remember what it was like to lose a lot of value in their portfolios, so they are trying to hedge out that risk by buying insurance in the form of options.

It’s this insurance buying that shows up as the spikes of fear in the VIX.

Yet we have seen over and over that investors tend to buy way more insurance than they really need. You could almost say that they keep buying flood insurance for past catastrophes rather than having a methodology for properly assessing the modest dangers that are actually presented.

This is a major anomaly in the marketplace. Intellectually, you would not expect it to happen repeatedly, but as my subscribers and I have seen over and over since the inception of the CounterPoint Options[4] service, it is a psychosis that investors never seem to shake.

The CounterPoint Options system has proved its worth in this environment by giving options traders the tools for exploiting this differential between the real and the feared. Sometimes it exercises its view via options on the VIX or its exchange-traded fund equivalent, the VXX. And other times the system exercises its view by trading options on equity indices themselves via ETFs — the SPDR S&P 500 ETF (SPY[5]) and the iShares Russell 2000 Index (IWM[6]).

Click to Enlarge The system’s instrument of choice last week was the IWM, and it managed to knock out its 22nd-straight successful sequence by opportunistically scooping up call options when the small-cap index sank sharply at the end of the June 5 session.

The CounterPoint Options system has no bias in favor of a rising or falling markets or volatility. Its main goal is to determine whether investors’ emotions are in the process of reaching extremes. Sometimes, the system will decide to hop a ride on that emotion by recommending options that will be successful if the directional impulse continues. Other times, it will see an opportunity to fade that impulse by recommending options that will pay off if the rush in one direction abruptly terminates and reverses.

Whichever way you decide to use the CounterPoint Options system — as a portfolio, or picking and choosing individual trades — having a quantitative system to “trade volatility” will get you way ahead, both in profits and in peace of mind.

Professional traders and hedge funds make huge profits off volatility. Now, Jon Markman’s service CounterPoint Options levels the playing field with the first service geared towards helping individual traders make steady, consistent profits with the VIX. Get more information on [7]CounterPoint Options today.[8]

Source URL: https://investorplace.com/2013/06/fear-index-got-you-scared-dont-be/

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