Coping with market panic: an options hedging guide when the VIX index soars
In recent days, global markets, led by the U.S. stock market, seem to be struggling
.
Last Friday, the U.S. non-farm payroll data and unemployment rate came in worse than expected, sparking fears of an economic recession and widespread market panic.
U.S. technology stocks were especially hard hit. In the Mag7 group, only $Apple (AAPL.US)$ saw a slight increase, while the rest declined, with $NVIDIA (NVDA.US)$ falling sharply in after-hours trading.
Market-wide pessimism has driven the VIX index to soar, closing up over 27% last Friday and reaching its highest point of the year. At one point today, it exceeded 40.
To cope with the sharp short-term decline, I'll introduce some methods to hedge downside risk related to the volatility index.
II. What is the VIX index, the barometer of market sentiment?
Its official name is the $CBOE Volatility S&P 500 Index (.VIX.US)$, more commonly known as the VIX Index, or fear index.
It is a real-time volatility index compiled by the Chicago Board Options Exchange (CBOE) that measures the implied volatility of the $S&P 500 Index (.SPX.US)$ over the next 30 days.
It's not just a number but a barometer of market sentiment.
We can understand it this way: When the VIX Index rises, it usually means that investors expect significant volatility in the SPX over the next 30 days. This volatility could imply either upward or downward movements.
However, by reviewing the historical trends of the VIX Index and the S&P 500 Index, it is not difficult to find that when the VIX Index soars, the SPX usually performs poorly
.
In most cases, when the VIX Index soars, overall market sentiment is negative; conversely, when it falls, the market tends to recover.
Therefore, the VIX Index has earned the nickname "fear index".
III. Using the VIX index to hedge downside risks
a) Analyze market panic levels to hedge in advance
Although the VIX Index measures only the volatility of the S&P 500 Index (SPX), it is often used as a benchmark for the entire U.S. stock market. By analyzing the VIX, we can gain insights into the level of market panic and take corresponding risk prevention measures.
Then, how do we determine whether the VIX is high or low?
The VIX Index fluctuates approximately between 10 and 30 most of the time. Therefore, most analysts believe that a VIX below 15 indicates a relatively optimistic market sentiment, between 15 and 20 represents a relatively neutral market environment, between 20 and 25 indicates rising market concerns, and between 25 and 30 suggests a rather turbulent market.
Once the VIX Index rises rapidly, you should pay attention and adjust your investment portfolio in advance. Whether you choose to sell or hedge appropriately, the goal is to maintain stability in a volatile market.
![Coping with market panic: an options hedging guide when the VIX index soars](https://sgsnsimg.moomoo.com/sns_client_feed/103132832/20240805/1722856044331-0d340aa33b.png/big?area=101&is_public=true)
b) Trade options/ETFs/futures that track the VIX for hedging
Since the VIX Index itself is not tradable, we can trade options, ETFs, and futures that track the VIX Index.
The VIX index has a mean-reverting characteristic, which means it tends to fluctuate around an average value. When the VIX moves beyond its normal range (usually between 10 and 30), there is an opportunity for it to revert to the mean. Based on this, we can trade on the VIX.
The VIX index often shows a significant negative correlation with market movements. During periods of market instability (when the market is full of stress and uncertainty), long the position on the VIX index is a popular choice.
Generally, when investors worry about a potentially significant market downturn, they tend to buy VIX call options as insurance. The purpose is to compensate for losses through the rise in the VIX when the market declines.
Currently, moomoo supports VIX Index trading. Click here to learn more.
Moomoo also supports VIX ETF trading. Through the ETF page on moomoo, you can easily go to Markets > ETF > VIX and filter ETFs to quickly identify the ETFs that long or short the index.
Note: While the ETF products mentioned above track the VIX, they don't fully replicate the VIX index.
When you trade the VIX, you are actually trading the volatility of the market, but not the price of an individual stock or asset. Thus, the key is to look at the volatility of the market as a whole, not whether a specific price is going up or down.
It's important to remember that market volatility changes all the time, and the VIX only reflects short-term volatility and is not suitable for long-term holding.
Therefore, whether it's VIX options, ETFs, or futures, you need to keep an eye on the market and be prepared to stop losses at any time to prevent further losses.
c) Position management and mindset management
Historically, when there is a significant surge in the VIX, it usually indicates excessive selling due to excessive panic and may signal that stocks have reached a short-term bottom. There is no need to panic, though, as the stock market will recover in the long run
.
If you think the market has reached a bottom, try buying stocks or shorting the VIX with a small position, and then add to your position gradually if the market picks up to make a solid profit. Even if you lose money, you can keep your losses in a small range.
If you are worried that your position will fall further, you can buy puts as "insurance". If the stock price doesn't fall, you can hold on to the stock and the maximum loss will be limited to the premium paid; if the stock price does fall, the gain from the increase in the price of the put can offset some of the loss; and if the market falls further, you can even make a profit.
Although a sudden drop in the market may cause temporary panic, the key is to stay calm and act wisely, as there are still opportunities.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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RVLTN : Led by Japan, created by an atmosphere purposely crafted to be absolute uncertainty and chaos by our government. Special mentions to the war criminals that someday will face their end, the Israeli occupation of Palestine, the EU leaders ( excluding. Hungary and Slovakia ) , particularly Vanderlyin, Macaroon (FR), Shulz (DE), most of the UK revolving joke, Duda (Pol), Kristersen (SV), Orpo (Fin), Kaya Calas
I keep wondering why people aren’t more angry. When will you all get angry?
LittleSoldier : Angry about what?? The land is Israel
…Period and what War crimes!! When are people going get Angry about Israel innocent civilians massacred and raped with American hostages taken captive. Let’s get seriously Angry about That!!! Unfortunately Palestine allowed terrorist to run free in their country, if you want to put the blame down it should be Hamas they set the fire in motion. Israel didn’t just wake day and attack Palestine, so get your facts straight!!!!
72734102 : It’s so great to know MSNBC crap fake Info is going Down! And Everyone is Going with flying colors to X to get their Dailey News! Real Truthful n Un censored! The Day is coming MSM will be obsolete! Only 27% of the people even watch or believe Anything they TRY to SELL! Hurray for Elon and our fight forfree Speech!
gancheong spider : Whose land it is depends on which part of history u read into or one's faith. But what is clear is that violence to tackle violence will only create more violence. Whatever is happening in Palestine is gonna create multiples of Hamas. It is so so so easy to convert the Palestinians who have seen their child, father, mother or whole family perishes in front of their eyes.
Ultratech : war has always been taking place since the inception of the sp500