May 29

Volatility…it might be the best value around?

Source: Bloomberg

The above chart shows the last 12 months of VIX index. For those who don’t know, the VIX, effectively, is a mathematical representation of expected future volatility of the S&P500 (its a little more than that but lets keep it simple).

For me, the VIX is the one “trade” that has consistently shown good value over the last six months once it has traded close to the 15 level. The way the VIX index typically moves is that if there is some bad news that gives the market a bit of a shock then the VIX more often than not, spikes upwards, and anyone owning a derivative of this index has an enormous return on their money. So given the sharemarket historically has traded at an average that is above 15 (by my calculations), trading currently close to 15 given the Euro Banking Sovereign crisis, poor US economic data, high commodity prices, it won’t take much for another “shock” for this index to spike again…like it has again and again over the last 1 year and before.

If only it was possible to trade in a relatively low risk way for the Australian retail investor (like me)!

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