Since the mini bear/correction finished up at the end of 2018, the volatility index (VIX) has been smashed. Just take a look at the chart, below, and you'll see that trend has been straight down. This stunning move by the markets of rallying some 22% off the lows is remarkable. Yet this move by the VIX has been even more impressive.
The drop from the mid-30's on December 24th to the low teens in less than three months time is historic. The VIX is back to the low levels we saw last summer/fall before a nasty decline ensued. It was during that period when a lengthy amount of complacency built up, and when a correction happened it caught many off guard.
That's normal, of course, to catch everyone looking to zig when the market wants to zag. For the most part, the market complies with the direction of volatility. Short pops in the VIX often mean brief and potentially scary dips in the markets. We saw that earlier this month, as you see the VIX had risen from 13 to 18 in about five sessions.
But as the stock indices embark on a breakout move in price, the VIX is showing massive complacency. When it is this low we often see a move higher in volatility and with it a move down in markets as mentioned prior. Are you ready for it? Low volatility of course means the markets are not expecting any big moves. As such, option prices are rather inexpensive.
We talk about buying protection and insurance all the time. Is there an ideal time? Of course not, but better to be safe than sorry. Why couldn't the markets correct by 5% just out of nowhere? Answer is: They can, and if you're not prepared you're going to be put in a bad spot.
What is the cost of buying some insurance for your portfolio? It's negligible right here. A SPY (SPY) 280 put, for instance, expiring next week was less than a buck at the close on March 15, 2019. If you had strong gains during the past week it would be a shame to just give them up in a short time, right?
Think about it.
I'm not advocating selling all of your holdings. Certainly with the markets up sharply it's not a bad idea to take some money off the table, as most pros are doing the same thing. Couple that with buying some cheap index put options (like the SPY, (QQQ) , (IWM) , (DIA) ) then you are insulating your portfolio from a major whipping. If we're wrong and the markets head higher, you didn't pay through the nose for protection.
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