Predicting Volatility With the VIX - Real Money Pro Tip

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The VIX is a great way to measure market volatility up or down. Why is this important? It clues us in to the direct sentiment that is moving markets. When the VIX is sliding down as it has been for months, investors and traders are more sanguine about risk and are willing to accept more chances on the investment curve.

When the VIX is running higher and markets are starting to wobble, investors reach for protection by either shorting markets or buying puts. The VIX measures the option variation between calls and puts, so when volatility is rising it means protection against a market slide is being bought.

We know markets don’t go up every day forever. Yet, it’s nearly impossible to time a market move down. When the market does slide or correct it doesn’t last too long. Investors/traders are usually slow afoot to reach for that protection. But when conditions are such as they are currently you could justify buying some protection. There is an old saying, "when the VIX is low it’s time to go, when the VIX is high it’s time to buy."

The best and most efficient way to protect a portfolio is to buy put "insurance" on the indices through their ETFs, the SPDR S&P 500 Trust  (SPY) - Get Report, Invesco QQQ Trust  (QQQ) - Get Report, SPDR Dow Jones Industrial Average ETF Trust  (DIA) - Get Report, or iShares Russell 2000 ETF  (IWM) - Get Report. With the VIX recently at 16%, the cost is minimal, and if wrong about the downside perhaps your long portfolio will overcome the cost of this insurance. You might worry about losing money, but you’ll sleep better at night knowing you have some insurance, just in case.

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