After spending most of 2012 in complete hibernation, the CBOE Volatility Index (VIX) is back. The gauge has jumped more than 13% over the past month, which matched the entire yearly gain for the S&P 500.
Is higher stock market volatility a foregleam of what lies ahead in 2013?
The VIX is a widely used yardstick of so-called "fear," because it tracks the expected volatility of the S&P 500 over the next 30 days. The measure is calculated from option prices.
While it's still too early to determine whether rising volatility will morph into a longer-term trend, the short-term trend is up.
And like a sleeping giant, the VIX is starting to move.
In the January 2013 edition of the ETF Profit Strategy Newsletter (published on 12/17) we wrote: "Both the CBEO Put/Call ratio and the VIX are drenched with complacency. Going long the VIX in 2012 for any extended period has resulted in outsized losses, but playing the short term bounces has been profitable.
"The VIX has refused to spend much time below the 15 level providing a solid support and buying area for VIX bulls. As it approaches that level, buying front month in the money calls is a good trade. Almost every time the VIX has moved below the 15 level, at a minimum a short term top in the S&P occurred and the VIX eventually rallied to 19. Previous 10% declines have sent the VIX into the upper 20s. We like going long the VIX JAN 14 CALL options (VIX130116C00014000) at $271 per contract."
