How to Profit From Increased Market Volatility

Not for the long term investor, the faint of heart, or the inexperienced, but this can buoy up your portfolio during times of increased volatility.

It has happened before and it will happen again and again: the market gets angry. Volatility rears its ugly head at the worst times and drives speculators running to the hills to avoid losses and causes college kids to empty out their Robinhood accounts. You need not despair because there is a way that you can either profit from volatility or, at a minimum, buoy up your portfolio during times of high volatility.

If you follow the markets, then you have no doubt experienced times of increased volatility. This week, the market has experienced increased volatility as traders sell and take their gains. The CBOE Volatility Index (VIX) is the standard gauge of volatility in the markets. CBOE states, "the VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPXSM) call and put options."

Although you cannot directly trade the VIX, there are other ways to take advantage of the moves in the index. Depending on your personal goals, you can opt for the 1x VXX Exchange Traded Fund (ETF) or the 1.5x UVXY ETF if you are willing to take on additional risk for the prospect of additional reward.

The VXX and UVXY move with the VIX at a 1:1 and 1.5:1 ratio respectively. Depending on your risk tolerance, you may opt for the 1.5x ETF or even a 3x VIX ETF, which I won't even name here.

There are different ways to use these tools. You can go long on them if you feel that market volatility is increasing or you can go short on them if you feel that market volatility is cooling down. Some people are speculating that market volatility will increase as we get closer to the 2020 election as President Trump battles it out with Vice President Biden. If you agree, then it may be in your best interest to go long.

I went short in mid-March 2020 shortly after the VIX peaked and rode the profit train down for a couple months before closing out the position, doubling my money. My portfolio was up when the rest of the market was still in correction territory.

Just remember when going short on a position, these words of wisdom:

"The market can remain irrational longer than you can remain solvent."

-John Maynard Keynes

What that basically means is that you can be correct in your assumptions about overvaluation, etc., but be absolutely wrong on the timing. Tesla (TSLA), for example, has been overvalued for some time. That hasn't stopped the stock from continuing its tear upward. Short sellers have lost billions of dollars on the move and Elon Musk has even taunted them by selling Tesla branded red satin short shorts. So, be careful if you go short! But, I digress...

The bottom line is that there are ways to take advantage of increased volatility in the markets and if you can stomach the risks, then the rewards may be worth it in the end.

I want to make a few things clear. First, I am not a professional investor, meaning that I do not work for a firm which specializes in investment management. My experience comes from 17 years worth of personal study/investing. In short, don't take this as investing advice and don't blame me if you lose a bunch of money.

You should also understand that any success I may have had will not necessarily translate to your success. We may view the situation and/or time things differently based on our own level of knowledge, experience, and perspectives. So, again, don't blame me if you lose a bunch of money.

Finally, none of this is a secret. I'm just putting it out there for you to come to your own conclusions.