One way to profit from a bear market
Update: The VIX call options mentioned in this post were sold at the end of November for a 50% gain, as noted in the Nov. 28 post, How to lose $8 million in the market
Investing Journey bought call options several days ago on the CBOE Volatility Index (VIX) to hedge against a correction in the market over next 2 months. They are down about 5% now.
The VIX, known as the fear gauge, measures the implied volatilities of stock options. When investors get fearful and the market goes for a tumble, those volatilities shoot upward and take the VIX with them - as well as the call options.
The purchased calls have a strike price of 15. Today, the VIX closed at 15.01. So they are right at the money. They expire Jan. 19. I picked 3 months out because the rate of time decay is not as bad as call options closer to expiry.
The VIX spiked up to 27 on Sept. 20 when the Evergrande crisis broke. It then trended down in fits and starts to the 15 level as of today.
At 15, the VIX is beginning to look cheap again considering the lower boundary for the index over the past 10 years is in the 10 to 12 range.
Maybe buying the calls will prove too early a move. Then again we have near record levels of valuation in the market, inflation running way above target, and gathering signs of a market top, for example the fire-hose gush of IPOs and mergers.
The plan is to roll the calls over in a month or two into another 3-month option.