Volatility Crash Provides Options for ETF Investors

Low VIX helps bulls, bears, greed and fear alike.

Investing is often a “zero sum game,” where investors are effectively pitted against each other, expressing their opposing views on some aspects of the markets. If one investor sells a stock, they have to sell it to another investor. 

That’s what puts the recent decline in the S&P 500 Volatility Index (the VIX) in a similar category, and calls for closer examination.  

With the proliferation of exchange-traded funds that deploy options in a dynamic variety of ways in recent years, a VIX at 13 that was 30 not long ago means the market is complacent.  

That, in turn, potentially offers something for everyone, because options are priced based on volatility levels. A low VIX makes both call and put options relatively inexpensive. 

Call Options 

If an investor is having a bit of FOMO and wants to up their stock market allocation, but do so with a predetermined cost outlay, buying call options accomplishes that.  

And for those who are enjoying the narrow stock market rally, but are concerned it could be a precursor to a sharp sell-off, as was the case in 2020 and 2022, purchasing put options is a similar case of defined risk and uncapped reward. 

The Amplify BlackSwan Growth & Treasury Core ETF (SWAN) and the Cambria Tail Risk ETF (TAIL) start out similarly, then diverge sharply. They both allocate 90% of their portfolios to U.S. Treasury securities, typically around a 10-year average maturity.  

From that point, they go in opposite directions to try to use the last 10% of their assets to supplement that solid Treasury security base. 

SWAN has $228 million In assets and aims to profit from rising stock prices by owning a pair of In-the-money call options, expiring six and 12 months out, and at strike prices of $380 and $400, respectively.  

This approach works best in environments like we’ve seen at the start of this year, when bond prices stay range-bound while the S&P 500 is rising. Indeed, SWAN is up 6.8% year to date. 

TAIL, a $190 million ETF, invests its last 10% in S&P 500 options as well. However, it owns puts, not calls, so it can aim to live up to its name and symbol by providing protection against major “tail” risk events like market crashes. That worked nicely during the late 2018 and early 2020 market dips, returning more than 25% in a matter of weeks on both occasions. 

Finally, the Simplify Tail Risk ETF (CYA) stays true to its edgy ticker symbol. This overlooked $18 million ETF goes a step deeper into options exposure, allowing a limit of 20% at cost to be allocated there.  

The fund also extends beyond S&P 500 puts option protection for its low volatility core holdings, also owning puts on the Invesco QQQ Trust ETF (QQQ) and call options on the VIX volatility index. The latter typically plays a role similar to puts on equity indexes, in that falling stock markets and a rising VIX typically go together. CYA, however, is down 44% year to date. 

A low volatility environment could be good news or bad news for the last half of this year. But thanks to a growing set of options-based ETFs such as the three mentioned above, ETF investors can research and identify many ways to complement their core stock portfolios.