We have an incredible opportunity in front of us.
In fact, the last time this type of opportunity occurred was 2018 . . . and we had the good fortune to reap 704.7% in profits. (Click here to learn the simple trade we used.)
How did we make such outlandish gains?
You see, in 2018, volatility came roaring back from the historically low levels that lasted throughout most of 2017.
At the time, I called for a bull market in volatility.
The volatility index – the VIX – had been hovering around 10, which was an historic low. Simultaneously, of course, the S&P 500 was climbing toward all-time highs.
The low volatility seen throughout 2017 meant that investors were not fearful about the future prospects of the market. At that point, volatility, as seen through the VIX, had not hit levels that low since early 2007.
And look what happened to volatility . . . more importantly notice how long volatility stayed above normal levels: .five years. That means volatility experienced a five-year bull run.
And look at 1996 Volatility hit historic lows only to rise abruptly and hold above normal levels . . . for almost eight years. Again, another bull market in volatility and tremendous opportunity.
Today, options sellers have another huge opportunity to exploit the next bull market in volatility.
To benefit from this long-term trend in volatility, you need to understand basics of the volatility index.
Let’s discuss the VIX and how it works . . . in simplified terms.
The Chicago Board Options Exchange’s Market Volatility Index, or the VIX, measures the implied volatility of the S&P 500 index, representing investors’ expectations of volatility in the S&P 500 over the next 30 days. Higher VIX values indicate anticipation of higher stock market volatility, while lower VIX values indicate the expectation for lower stock market volatility.
With stock markets tending to “take the stairs up and the elevator down,” as the old saying goes, higher volatility is associated with lower prices most of the time. So, if investors think equities are going lower, they think the move will be accompanied by increased volatility, and therefore will be willing to price the VIX higher.
Basically, low volatility reflects investors paying less for future downside protection. Paying less for downside protection means investors are less concerned about the possibility of downside . . . so low volatility means investors are becoming more “complacent.”
It’s kind of like a person foregoing hurricane insurance because there hasn’t been one in several years. Their recent good fortune of no hurricanes destroying their house has made them complacent about the possibility of future hurricanes.
So indeed, a low VIX represents a certain amount of complacency and lack of awareness of possible downside among investors in equities. And historically when we see extremes in low volatility like what we saw back in 2019, a push higher is right around the corner – which means equities could experience a decline . . . and that is exactly what is happening right now.
The New Options Bull Market
But the bloodbath in equities has led to a tremendous opportunity in volatility.
This is why, in my opinion, I think we are entering into a new bull market . . . a bull market in volatility. The question is, how can we take advantage of this next bull market in volatility?
As I have pointed out in the charts above, we’ve seen two other instances over the last 20 years where volatility hit all-time lows only to rally for the next five to eight years.
Volatility is back, and while most investors are fearful – and more importantly, losing money – options sellers, using risk-defined strategies, are confident and making money.
In 2018, most investors lost money. But we made tremendous gains.
If history does indeed repeat itself, we could be in the early stages of an incredible opportunity for options sellers.
So far, in 2020, since the pullback began, most investors are losing 25% to 35%, and potentially more.
Meanwhile, we have locked in 91.9%, still well below the 704.7% gains we saw in 2018. But hey, we still have eight months left in one of THE BEST market environments for using our strategies.
If you wish to learn more about how to take full advantage of the current market environment, please click here.