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If you pay attention and are prepared to act in the next bull market, it will mean the biggest potential options profits of your life.
It’s not the first time I’ve written about this type of bull move.
In late 2016 I wrote an article about “the next bull market,” and described the VIX volatility index.
At the time I said, “The VIX had just hit historic lows around 10 and the market was climbing towards all-time highs. Low volatility means that investors are not fearful about the future prospects of the market.” At that point volatility had not been at levels that low since early 2007.
Today, options sellers have a huge opportunity . . . to exploit the next bull market in volatility.
To benefit from this long-term trend in volatility, you need to understand basics of the volatility index.
Let’s discuss the VIX and how it works . . . in simplified terms.
The Chicago Board Options Exchange’s Market Volatility Index, or the VIX, measures the implied volatility of the S&P 500 index, representing investors’ expectations of volatility in the S&P 500 over the next 30 days. Higher VIX values indicate anticipation of higher stock market volatility, while lower VIX values indicate the expectation for lower stock market volatility.
With stock markets tending to “take the stairs up and the elevator down,” as the old saying goes, higher volatility is associated with lower prices most of the time. So, if investors think equities are going lower, they think the move will be accompanied by increased volatility, and therefore will be willing to price the VIX or volatility higher.
Basically, low volatility reflects investors paying less for future downside protection. Paying less for downside protection means investors are less concerned about the possibility of downside . . . so low volatility means investors are becoming more “complacent.”
It’s kind of like a person foregoing hurricane insurance because there hasn’t been one in several years. Their recent good fortune of no hurricanes destroying their house has made them complacent about the possibility of future hurricanes.
So indeed, a low VIX represents a certain amount of complacency and lack of awareness of possible downside among investors in equities. And historically when we see extremes in low volatility like what we are seeing currently, a push higher is right around the corner – which means equities could experience a reprieve.
The New Options Bull Market
But the reprieve in equities should lead to a tremendous opportunity in volatility.
This is why, in my opinion, I think we are entering into a new bull market . . . a bull market in volatility. The question is, how can we take advantage of this next bull market in volatility?
As you can see in the chart above, we’ve seen two other instances over the last 20 years where volatility hit all-time lows only to rally for the next six to ten years.
Volatility is back, and while most investors are fearful and more importantly, losing money, options sellers are confident and making money.
In 2018, most investors have lost money. I can proudly say that we have been making tremendous gains in 2018. If history does indeed repeat itself, we could be in the early stages of an incredible opportunity for options sellers.
Has the bull market in volatility started? I don’t know. We’ve certainly seen it pop recently, but I want to show you how to prepare and benefit from the long-term trend in volatility.