As reported by ETF Trends’ Paul Weisbruch, the equity markets suffered further losses Monday after feeling under enormous selling pressure late last week, capitulating at one point during Friday’s session when the S&P 500 Index traded as low as 1168.09.
For most of the trading session on Friday, equities traded in the red (with the Dow closing higher after eking out a gain) and at one point, with equities trading at their lowest levels since late November of last year, we actually saw the VIX (CBOE S&P 500 Volatility Index) leap fiercely and suddenly, trading as high as $39.25. This was the highest intraday price point touched in VIX since May of 2010 (during the week of the Flash Crash).
The extreme price volatility and speed of recent price movements has created potential trading opportunities, but for the average portfolio manager or investor, reaction time will likely just not be quick enough to realize a good trade when it presents itself. That said, a potential strategy to employ, especially if these conditions in the equity market continue, with daily “macro” headline risk existing in the marketplace and influencing the tape to a large degree, would be one of “bracketing” buy and sell orders at what would normally seem like “well away” orders, either on a “Day” or “GTC (Good Till Cancelled)” basis. For example, selling VXZ last Friday anywhere above $57.00 or buying XIV below $11.00 now look like fantastic intraday trades, based on the fact that the moves to those extremes was so short lived, and an immediate price regression in the opposite direction occurred just as these levels were touched.
However the only realistic way for holders or users of these VIX related ETFs and ETNs to book large intraday gains by taking the other side of such extreme moves is to put out limit orders on either side of the book (Buys or Sells), at some “factor” around the current levels of where the products are trading themselves. The price levels orders should be put out at should not be completely unrealistic, i.e. trying to sell VXZ at $100 on an intraday basis with the product trading in the $50s is very unlikely to yield good results, but at the same time can be “wider” than usual given the current market environment and the potential for short term gapping effects due to what seems like less liquidity being available in the overall marketplace during quick, unilateral price moves in the market indices. Then, by monitoring the VIX itself along with overall market activity, one can tighten or widen their parameters and sensitivity based on where the intraday patterns are themselves versus historical volatilities.