The VIX Is Going to Be Your Worst Enemy

The VIX is going to be your worst enemy.

I keep saying this. I've been saying it for years, and people do not get it, and it's infuriating.

The VIX is 30 days out and it's an equation. It prices how much movement traders expect in the S&P 500 over the next month, and then it gets quoted on television like it's a reading on your portfolio.

Now go look at what you own.

Friday morning the VIX sat at 17. The sector that was driving markets that day was priced over 105% implied volatility for that single session, and the Nasdaq's volatility index was at 27. Implied volatility is the market's price on how much a thing moves, so a 105 means the market has no clue where it lands.

Equity volatility is sky-high. It's sick how far off the scale it is, and none of it shows up in the number most people are watching.

The mismatch is duration. The VIX averages 30 days on an index. If you're in single names or anything short-dated, 30-day vol doesn't do a damn bit of good for you.

Nobody cares about next Friday. What matters is the vol on the product you're holding, over the timeframe you're holding it, and that number can be five times the VIX without the VIX moving at all.

Most people are like a moth to a flame. They are. They're not in the index, they're in high volatility, high impact underlyings, and then they grade their risk with a number built for something they don't own.

This is what kills traders. You look at a 17 and you feel fine, and the thing sitting in your account is moving 10% between breakfast and lunch.

If you're long stocks and you're not hedging in some way, shape or form, you've got a problem. I don't care what you're long. There's already an open wound in this market and you can see it in the Nasdaq.

You can buy volatility, and you probably should.

None of this needs a market call. Pull up the implied vol on the specific thing you hold, for the duration you hold it, and set it next to the VIX. If those two numbers are nowhere near each other, the VIX hasn't earned the space it's taking up on your screen.

To your success,

Don Kaufman

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