Quick Take: What's Next for the VIX?
NEW YORK ( TheStreet) -- With the markets nearing all-time highs and the VIX sitting near its 2013 lows, is the market at a potential top? Tim Biggam, chief market strategist at MoneyBlock gives TheStreet's Jill Malandrino a peek at his strategy going forward.
With the VIX just under $14 and the S&P 500 nearing a breakout, we could see the VIX sitting somewhere in the $12 range should equities continue their move. But what if they don't?
If the S&P 500 fails to break out to more than 1675, which is about 50 basis points away, investors might see quite a bit of downside. Earnings season, which began Monday with Alcoa's (AA) report, could either accelerate the move higher or be the cause of failure.
Although Biggam acknowledged that new highs may be just over the horizon, he's looking to hedge along the way. By purchasing volatility near its year-to-date lows, Biggam will have a limited-risk entry.His hedge will be twofold though, because when volatility is cheap, so are options. Along with buying volatility, he will be looking to buy slightly in-the-money or at-the-money August puts and sell shorter-term puts (likely late-July and August weeklies) against it, creating what is known as a diagonal spread. The hedge will be a double-winner should the broader markets stall out near these levels and begin to fall. Although domestic and international markets are cheering the slightly dovish comments from Federal Reserve Chairman Ben Bernanke on Wednesday, the volume has not been overwhelming. Adding to that, Biggam said that he believes the valuations for equities are getting a little stretched and earnings might be what brings investors back down to Earth. -- Written by Bret Kenwell in Petoskey, Mich. . Follow @BretKenwell
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