The Top 3 Ways to Trade a Pullback in Volatility

volatility - The Top 3 Ways to Trade a Pullback in Volatility

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Novel coronavirus fear spiralled out of control. States have issued “stay at home” orders. Schools closed for the year. Events were cancelled. Flights were grounded. All thanks to a global pandemic that has now affected more than 400,000 people just in the U.S. Fear was so out of hand, the CBOE Volatility Index (CBOE:VIX) rocketed to a high of 83 before falling to a current level around 43.

And, at the time, some of the safest opportunities were those I first mentioned on Feb. 27, including the ProShares Ultra VIX Short-Term Futures ETF (NYSE:UVXY), which ran from $20 to a high of $135. The Velocity Shares Daily 2x VIX Short-Term ETN (NASDAQ:TVIX) ran from $86.50 to a high of $1,000. Even the iPath S&P 500 VIX Short-Term Futures (AMEX:VXX) ran from $21 to a high of $78.84.

Though, at some point, volatility will begin to fall.

When that happens, you want to be well positioned to make money from that, too. Here are the top three ways to do just that.

  • Short VIX Short-Term Futures ETF (NYSE:SVXY)
  • VelocityShares Inverse VIX Mid-Term ETF (NASDAQ:ZIV)
  • Invesco QQQ ETrust (NASDAQ:QQQ)

These three exchange-traded funds (ETFs) or exchange-traded notes (ETNs) are the ones to watch. But a word of warning — some of these funds intend to match the daily results of the index, and holding them long-term can introduce its own volatility.

Profit From Volatility: ProShares Short VIX Short-Term Futures ETF (SVXY)

The Top 3 Ways to Trade a Pullback in Volatility

Expense Ratio: 0.95%, or $95 per $10,000 invested annually

My first pick is the SVXY. This ETF was designed to offer one half the inverse of the S&P 500 VIX Short-Term Futures Index, daily. Along with the VIX, it was designed to track the changes in expectations for one month in the future.

At the moment, the ETF trades around $32 after diving from a high of $67.50. With a good chunk of fear firmly priced into the market, the SVXY ETF could refill a bearish gap around $66, near-term. Of course, plenty of patience is required at the moment.

We must also remember that crisis often leads to big opportunity. As even billionaire Warren Buffett will tell you, be fearful when others are greedy, and greedy when others are fearful. Baron Rothschild also teaches us to “buy the blood in the streets.”

VelocityShares Inverse VIX Mid-Term ETN (ZIV)

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Expense Ratio: 1.35%

My second volatility pick is the ZIV. This ETN was designed to offer inverse exposure to an index of VIX futures. It seeks -1x the returns of the S&P 500 VIX Mid-Term Futures for a single day. As volatility decreases, the ZIV ETN will typically push higher.

At the moment, the ETN trades around $32 after tumbling from a Feb. 2020 high of $76.47. With a good amount of patience, I strongly believe the ZIV ETN could refill its bearish gap around $75 a share.

As even Sir John Templeton would tell investors, “The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”

Invesco QQQ ETF (QQQ)

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Another way to trade deflating volatility is by buying the QQQ, which I mentioned on March 25, 2020 as it traded at $185 a share. At the moment, it’s up to $202 and could refill a bearish gap around $230 a share with patience.

The beauty of the QQQ ETF is that it offers more for less. And most of its top holdings are wildly oversold on coronavirus fears. For less than $200 a share, you’re offered exposure to tech companies, like Tesla (NASDAQ:TSLA), Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), Adobe (NASDAQ:ADBE) and dozens more at a steep discount.

With a good amount of fear priced in, I strongly believe the QQQ is overdue for a big rally.

Ian Cooper, a contributor to, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, he did not hold a position in any of the aforementioned securities.

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