Let's talk Volatility $VIX $UVXY
We had the opportunity to sit down with Master Trade Michael Listman of UVXY.pro
We delve in to the Volatility Index, what the heck it is, why it matters to you as an investor/trader and how to use it to benefit you in the market.
Please be sure to read the disclaimer on our site before moving forward, comment below and follow us on social media (Instagram, and twitter)!
It was fantastic to have Michael Listman on one of my first hosted Twitter Spaces! We had over 10,000 views and 70 people attend my live, wide ranging discussion with Michael. We couldn't even getting to everything we wanted to talk about! Don't worry, I cover what we didnt get to in my post!
At some point in your trading career you've heard about the VIX or volatility index.
So what exactly is it and how do use it to make decisions in the market?
The volatility index (VIX) is a measure of the expected volatility of the stock market over the next 30 days. It is also commonly referred to as the "fear index" because it tends to rise during times of market uncertainty and decline during times of market stability. The VIX is calculated based on the prices of options contracts on the S&P 500 index, which are used to hedge against market fluctuations.
Higher VIX values indicate higher expected volatility, while lower values indicate lower expected volatility. The VIX is often used by traders and investors to assess market risk and make trading decisions.
It is important to note that the volatility index (VIX) itself cannot be directly traded. However, traders and investors can use the VIX to gain insights into market sentiment and make trading decisions accordingly.
One common strategy is to use the VIX as a contrarian indicator. When the VIX is high, it suggests that the market is in a state of fear and uncertainty, and that prices are likely to be lower. Conversely, when the VIX is low, it suggests that the market is complacent and that prices are likely to be higher.
Therefore, if the VIX is high, a contrarian investor might consider buying stocks that are oversold or undervalued, as they are likely to rebound once market sentiment improves. Similarly, if the VIX is low, a contrarian investor might consider selling overvalued stocks, as they are likely to decline once market sentiment shifts.
It is important to note that trading based on the VIX can be risky, as market sentiment can be unpredictable and volatile. As with any investment strategy, it is important to do your own research and consult with a financial advisor before making any trading decisions (be sure to inquire within if that's something you need).
So what does all of this have to with the Spaces that I hosted lasted Thursday, well Michael is a master of the $UVXY, which is an exchange traded product, that tracks the $VIX.
What is the UVXY?
UVXY stands for "ProShares Ultra VIX Short-Term Futures ETF". It is an exchange-traded fund (ETF) that seeks to provide 2x leveraged exposure to short-term futures contracts on the CBOE Volatility Index (VIX), which measures the expected volatility of the S&P 500 index over the next 30 days. It is based purely on a calculation, which unlike other traded underlying's is not affected by direct supply and demand forces.
UVXY’s price is governed by a single effect; the percent change in a combination of front and second month VX futures on a daily basis. It’s unlike other free-floating underlying's where supply and demand forces are satisfied by the increase or decrease in price until those forces equalized.
The UVXY ETF is designed to move in the opposite direction of the stock market, so when the stock market is down and volatility is high, the UVXY typically goes up, and vice versa. However, it is important to note that the UVXY is not a perfect inverse of the stock market and its performance can be affected by factors other than market volatility.
Due to the high degree of leverage and the short-term nature of the futures contracts used by the UVXY, it is considered a high-risk investment and is typically used by experienced traders who are seeking to hedge against short-term market volatility or to make short-term trades based on market sentiment. As with any investment, it is important to do your own research and consult with a financial advisor before investing in the UVXY.
How did Essex Trading trade it last week and/or use it to trade market last week?
The chart above includes the $UVXY for the week of May 1st, 2023, it includes moving averages, MACD and the Williams %R (please see past blog posts for an explanation of these indicators). You can see very clearly that we retested the April 25th highs of $4.23 last Thursday (ironically right when we launched our Spaces) as well as tested the 200 SMA on the hourly chart. This is an important spot on a smaller timeframe that I look at to see if we can break over.
Just like that the spot from those previous highs acted as resistance and we sold off from there and got a ripper of a Friday. However, note the $UVXY is consolidating here and if trades sideways to me it could mean that the market ($SPY) is consolidating here and could be signaling a top and the $UVXY could see spike in the not to distant future.
We appreciate everyone that takes the time to read our blog posts and don't forget to trade confidently!
Essex Trading Quote of the Day (#EsxQotD)
"Trends become more apparent as you step further away from the chart."
~ Ed Seykota