Episode 415: How to Turn Chaos Into Cash With Volatility Trading

On this week's Stansberry Investor Hour, Dan and Corey are joined by Jim Carroll. Jim runs the Vixology Substack, where he analyzes stock market volatility. He also serves as senior wealth adviser and portfolio manager for investment adviser Ballast Rock Private Wealth.

Jim kicks off the show by describing how he got his start in finance and how he found his way to volatility trading with CBOE Volatility Index ("VIX") futures. He breaks down what caused "Volmageddon" in February 2018, what he learned from the experience, and which specific factors drive the VIX. As Jim explains, many investors don't realize that the VIX can soar higher when everyone is piling into buying call options...

Let's go back to the meme stocks. Everybody's buying call options on all kinds of stuff. That can also push the VIX up because volatility really doesn't care whether it's volatile to the downside or to the upside. So the VIX really reflects people's enthusiasm for buying options on the S&P [500 Index].

Next, Jim talks about his "VIX Mix" composite of 17 different indicators that he uses as a warning signal for what's about to happen in the markets. This applies to both the downside and the upside, with the VIX Mix predicting crashes and rebounds alike. Though primarily for trading, Jim explains that long-term investors can use this tool to their advantage too, since they can prepare for bottoms and buy more stock when those drawdowns hit. He then warns listeners of several things they should keep in mind about volatility data, including small sample sizes, the fact that volatility clusters, and the outsized influence of institutional investors...

In the volatility world, there's a lot of institutional volatility selling these days... And I think [it's] one of the reasons that we see these spikes out of nowhere. Go back to the Fed meeting in December, which we've all forgotten. But there was a couple of days' spike in volatility that was very significant... We've got institutional volatility selling that dwarfs anything retail might be doing.

Finally, Jim gives his opinions on VIX futures products, such as the popular Simplify Volatility Premium Fund (SVOL). He reminds listeners to beware of embedded leverage and to size their positions carefully – especially because the stock market has become like a giant casino. Jim also analyzes why the VIX is tilted more toward the bearish side, how "market makers" profit from investor fear, and how to more accurately gauge market sentiment...

One of the things you can do to sort of gauge underlying sentiment is to compare the action in the VIX with the action in the VIX futures. And if the VIX futures are not moving as much as the VIX, I would trust the VIX futures as a better gauge of what's really happening.

Click here or on the image below to watch the video interview with Jim right now. For the full audio episode, click here.

Additional past episodes are located here.)

The transcript is coming soon.

This Week's Guest

Jim Carroll is a senior wealth adviser and portfolio manager for investment adviser Ballast Rock Private Wealth. Before this, he had worked at multibillion-dollar investment adviser Tidal Financial Group, founded wealth adviser LongRun Capital Management, spent four years as chief financial officer of a Nasdaq-listed company, and worked 16 years as an investment banker with Smith Barney, Kidder Peabody, and Bear Stearns. Jim's Substack, titled Vixology, analyzes stock market volatility to craft systematic long or short exposure designed to produce uncorrelated returns.

Jim earned his bachelor's degree in psychology from Claremont McKenna College and his Master of Business Administration from Harvard Business School. He also served four years of active duty as an officer in the U.S. Army.