Volatility is coming for US stocks. And for a certain kind of amateur trader, nothing could be more exciting.
The world’s largest economy is in an unusual position. A tight presidential election comes as the Federal Reserve cuts interest rates for the first time in four years. There is no Wall Street consensus over the future of this year’s tech-driven stock rally or the likelihood of a recession. Tensions in the Middle East worsen by the day.
Thrill-seeking traders are utilizing a suite of ETFs to facilitate bets on potential market chaos. Most are linked to the Chicago Board Options Exchange Volatility Index (VIX), the most-watched measure of stock turbulence. Products tracking this so-called fear index offer rich rewards when uncertainty is at its highest, and some day traders are gearing up for more action as the year draws to a close.
“We’re starting to get into unprecedented territory here,” says Akshay Aravindan, a 25-year-old software engineer at Microsoft who trades early in the morning before work starts. “This market is going to be really awesome to adjust your positions based on how intense vol gets.”
The VIX soared to a record during the early days of the Covid pandemic. It spiked again after Russia’s invasion of Ukraine. Then it trended down until August, when hawkish moves by Japan’s central bank and fears over the US economy spooked investors and spurred a $6.4 trillion stock wipeout. Iran’s recent missile attack against Israel fueled another spike.
Products that allow traders to profit from volatility include ETFs like ProShares Ultra VIX Short-Term Futures (UVXY), Simplify Volatility Premium (SVOL) and 2x Long VIX Futures (UVIX). In August, each of these ETFs clocked record trading volumes. For UVXY, more than 90,000 shares changed hands in just the first week of September — more than in the entire month of December 2023.
“On those days when all hell breaks loose, nothing comes close to the returns volatility ETFs provide,” says Bloomberg Intelligence ETF analyst Eric Balchunas. “Outside of that day they’re going to sit there and take your money.”
Options on UVIX earned 33-year-old Alex Benson around $1,000 the week before the Fed lowered interest rates in September. The Orange County car dealership manager did some research on the topic by asking ChatGPT to compile spikes in the VIX in the periods before and after Federal Open Market Committee meetings. He then noticed volatility declining at a time when his research suggested it should be going up.
“Now I’ve leveraged those gains into a short position, and so far that’s going really well,” he said.
Of course, not all bets are winners, and volatility plays can be especially tricky. The prospectus for UVIX warns that its funds “may not be suitable for investors who plan to hold them for periods longer than one day, particularly in volatile markets.” UVXY and UVIX deliver big gains on wild trading days but are down about 30% and 60% this year, respectively. Their expense ratios are also much higher than plain-vanilla ETFs.
Traders are divided on the potential causes and direction of volatility for the remainder of the year.
“I think the close, contentious election is going to cause the most volatility,” says Nick Rokke, a 39-year-old research analyst in Fort Lauderdale, Florida who looks for turning points in the market during the day and tries to sell to capture price reversals. “You also have to worry about what interest rates will do and if World War Three will break out.”
Michael Listman trades volatility full-time and uses UVXY. The 58-year-old from Idaho has been using data from the 2016 and 2020 elections to navigate his trades, but he thinks the economy will matter more for vol than the election.
“Everything the Fed does rules your world,” he said. “The markets know this. It’s a game of trying to guess it right and front-run it. The first one through the door gets the biggest profits.”
This article was provided by Bloomberg News.
