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Risk VS. Reward Of Buying The Volatility Index (VIX)



January 23, 2013 – Comments (0)

The Volatility Index aka Fear Index is sitting near 12. This level has not been seen since 2007, prior to the financial collapse. While housing prices are not where they were, other bubbles have formed, mainly in the bond market. To see the VIX near 12 is scary to say the least.

So is it smart to invest in an ETF that tracks the VIX? Let's take a look at the VelocityShares VIX Short Term ETN (NYSEARCA:VIIX) and iPath S&P 500 VIX Short Term Futures TM ETN (NYSEARCA:VXX). Both allow you to play volatility but each carries with it additional risks. First, understand that each month these ETF's must roll over their VIX contracts. In doing so, there is some slippage that occurs. Like many double and triple ETF's, these will eventually go to zero over the long term. Because of this, they should only be used as short term trading vehicles, held for days or a few weeks.

If you only use them as short term vehicles, they are fantastic if you can read the market like a pro.  This market is as complacent as ever. Retail investors are dumping money into the markets at record pace just like in 2007. There is an overlying feeling the Federal Reserve will always be there to bail out the markets with more money printing. While the VIX could see $10, the risk reward definitely favors the upside. I myself am scoping it out, looking for the proper entry for a small position in the next few days.

Gareth Soloway

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