Stocks finished sharply lower on Wednesday, with losses accelerating in late afternoon trading after the New York Stock Exchange (NYSE) halted trading amid “internal technical issues.” The NYSE resumed trading late in the session after a nearly four-hour delay, which temporarily added fuel to investor anxiety.
The S&P 500 fell 1.7%, with every sector finishing in negative territory, led lower by materials, telecom and energy. Once again, crude oil was lower and gold traded higher. While the Greece deadline was pushed to Sunday, the failure of China’s support measures to prop up their markets continued to operate as a drag on the U.S. markets.
Overseas turmoil and the glitch with the NYSE trading system helped push volatility sky high. But these situations tend to correct quickly. It’s sort of like an outburst from a volatile friend, and then they’re chill. They didn’t really mean anything by it. Don’t think it was the start of something much worse.
Such outbursts are likely to abate and disappear almost as quickly as they appear — and play for that inevitable decline in the CBOE Volatility Index (VIX) and volatility-related instruments.
One of the few free lunches in investing, one of the few anomalies that works over and over, is that institutional traders will reach for too much insurance when prodded by anxiety. Way too much. That shows up as a spike higher in the VIX that is almost always reversed in the ensuing days, if not weeks. You can certainly buy puts on the VIX to play this return to normalcy, but the CounterPoint Options system found a better trade in the iPath S&P 500 VIX ST Futures ETN (VXX) to profit.
Buy the VXX Aug. 21st $21 puts at current levels.
When your order is filled, set up to sell the entire position at $5.80 limit, good till canceled, which should better than double your money from current levels.
Jon Markman offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, designed to help individual traders make steady, consistent profits with volatility-related instruments.
