How to profit from a volatile stock market

Market volatility

If you are someone who follows the stock market, even if you are not invested in it then you would have noticed that in the last week or so, it has been extremely volatile. The largest change came when the Dow dropped almost 1,000 points before it recovered 2/3 of it in the same day. As a side note, they are still not 100% certain what caused that freak drop in the first place. The recent volatility arises largely from European debt levels and a general uncertainty about the European economy.

When this volatility is present it can create unusual, unexpected and sometimes illogical results from individual stocks. This can make it very tough to choose where to invest and divest. One would think that simply investing in companies that have very little exposure to Europe should be a safe bet, but that has not panned out. On days when the market is negative on the European economy then virtually all stocks take a hit, even ones that have nothing to do with Europe. These stocks drop because the concern is that Europe can drag down a fragile world and North American market which means that every company is at some risk.

Gold is where investors often like to put their money as a safe haven during uncertain times. This strategy is part of the reason gold prices went higher during the recession. Some experts are advising people to do that now as well and many think that gold still has room to go up in price from its current level. However, there is another investment one can make in this time of volatility that may be more lucrative than gold.

It is called the VIX, which is its ticker symbol that stands for the Chicago Board Options Exchange Volatility Index. Although the stock market is based in New York, markets in Chicago are used more for trading options, futures contracts and other, non-corporate stocks. The VIX Index is referred to as the fear Index because it tracks the volatility in the stock market. Actually, it tracks the expected market volatility for the next 30 days for the S&P 500. Volatility is caused by uncertainty, fear and confusion which are why the VIX Index earned the scary nickname. If someone is interested in this index, it is possible to invest directly in it.

The VIX Index has increased about 50% since the beginning of May, a two week period. Once the markets settle down and the smoke over the European economic uncertainty has cleared, then perhaps exiting this investment is a good idea, but in the meantime, it seems like a money maker. The only concern that should be looked at very carefully with this investment is to see whether the volatility has reached its peak and will only stabilize from now on. If you believe that this is the case, then this Index is not where you want to put your money.

As I have mentioned in past posts, I am not a financial advisor or an expert in the stock market. I am basically using my own common sense approach with my knowledge and understanding of how the world works and to a lesser extent, I am relaying the thoughts of some experts that do trade stocks, whose opinions I value. Good luck if you invest in the VIX Index.