Last week, I met up with my dear childhood friend Sophia. We had some really nice green tea (sencha) at a lovely tea house in downtown Manhattan. The recent events in markets were on her mind. She wanted to know how she could perhaps profit from market movements. Sophia had some specific questions about the VIX index.
Some of her questions were:
- What exactly is the VIX?
- How do I buy the VIX?
- What’s the best way to profit from market uncertainty?
VIX Index Defined
The VIX index is a measure of market uncertainty. When there is more apprehension in the S&P 500, the index increases. On the other hand, when there is more stability in the market, the index declines. During the past few weeks the index has increased and decreased quite a lot.
How to Buy the Index
It’s derived from an elaborate math calculation on options prices on the S&P 500, and you cannot buy the index.
Now, there are some investment products based on the VIX. They are very complicated, based on complex mathematical formulas, and hard to understand. It’s best to stay away from them.
Profiting from Market Uncertainty
When you try and guess what the market will do over the next day, or week, you are simply guessing. You are better off not doing this and sticking with your financial plan that will lead you to the outcomes you desire.
Sophia was a little upset that she couldn’t make some money with the recent market movements. She also remembered that market downs and ups are already considered in her financial plan. This gave her a lot of comfort, especially with everything that has happened recently in markets.
If you have any questions on market volatility, the VIX index, or financial planning, please let me know.