Low VIX Once Again Signals Caution
Bob Lang | May 13, 2019 12:38AM ET
With so much on the line this past week the markets flirted with a total breakdown that would have pushed the bulls aside. But alas, as has been the case since the beginning of the year, the bulls were saved by dip buyers. We saw some testing and re-testing of some important levels but the buyers stood tall once again.
It won’t always be like that, and there will come a time when those buyers on weakness just don’t see a reason to step up. In those instances, the markets will swoon, as they did last October and December. Recall in late September 2018 the VIX was still very low but the internal conditions of the market were eroding.
That was a sign of caution. Currently, we don’t see those same conditions occurring, but with the VIX is still so low that it is prudent to once again talk about having protection. As volatility is low, it means option premiums are dirt cheap. They are practically on sale, hence it is okay to have some puts on just in case.
What is that event? We don’t know, but clearly, with the markets are overbought here, without much of a correction in 2019 there is certainly a chance we’ll get a whack. And what if the dip buyers don’t add? They certainly are not calling anyone to say ‘yea or nay’. But if that market downturn arrives and you have some protection, you'll likely lose far less than you would without any protection.
It's easy to do, just find some at the money strikes on the SPY, DIA, QQQ and pick up some puts anywhere from 1-3 weeks out. If a pullback does not occur, well then your portfolio of long stocks or long call options should rise, and the loss from the puts should be negligible. I do this often, and while it drags on my overall performance, it helps me sleep better at night.
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